10-K 1 cvo-20161231x10k.htm 10-K Document

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2016
Commission file number 1-12551
 
 
CENVEO, INC.
(Exact name of Registrant as specified in its charter.)
COLORADO
 
84-1250533
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
200 FIRST STAMFORD PLACE
 
 
STAMFORD, CT
 
06902
(Address of principal executive offices)
 
(Zip Code)
 
 
 
203-595-3000
(Registrant’s telephone number, including area code)
 
 
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class
 
Name of Each Exchange on Which Registered
Common Stock, par value $0.01 per share
 
New York Stock Exchange
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes o No ý
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes o No ý
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ý No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.  Large accelerated filer  o Accelerated filer o Non-accelerated filer o Smaller reporting company ý
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý
As of July 2, 2016, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was approximately $46.8 million based on the closing sale price as reported on the New York Stock Exchange.
As of February 22, 2017, the registrant had 8,553,167 shares of common stock, par value $0.01 per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE 
Certain information required by Part II (Item 5) and Part III of this form (Items 11, 12, 13 and 14, and part of Item 10) is incorporated by reference from the Registrant’s Proxy Statement to be filed pursuant to Regulation 14A with respect to the Registrant’s Annual Meeting of Shareholders to be held on or about April 27, 2017.
 



CENVEO, INC. AND SUBSIDIARIES
TABLE OF CONTENTS

 
PART I
 
 
 
 
 
 
Page
 
 
 
 
PART II
 
 
 
 
 
 
 
 
PART III
 
 
 
 
 
 
 
 
PART IV
 
 
 
 





1


PART I
Item 1.  Business

Overview

Cenveo, Inc. ("Cenveo," the "Company," "we," "our," or "us") is a diversified manufacturing company focused on print-related products. Our broad portfolio of products includes envelope converting, commercial printing, and label manufacturing. We operate an extensive network of strategically located manufacturing facilities, serving a diverse base of customers. We operate our business in three complementary reportable segments: envelope, print and label.

Envelope. We are the largest envelope manufacturer in North America. Our envelope segment had net sales of $865.2 million and $908.7 million and operating income of $60.7 million and $66.4 million for the years ended 2016 and 2015, respectively. Total assets for our envelope segment were $403.2 million and $445.4 million as of the years ended 2016 and 2015, respectively. Our envelope segment represented approximately 52.1% of our consolidated net sales for the year ended 2016.

Our envelope segment offers direct mail products used for customer solicitations and transactional envelopes used for billing and remittance by end users including financial institutions, insurance and telecommunications companies. We also produce a broad line of specialty and stock envelopes which are sold through wholesalers, distributors and national catalogs for the office product markets and office product superstores.

Print. We are one of the leading commercial printers in North America. Our print segment had net sales of $493.5 million and $511.0 million and operating income of $17.6 million and $15.1 million for the years ended 2016 and 2015, respectively. Total assets for our print segment were $256.9 million and $266.1 million as of the years ended 2016 and 2015, respectively. Our print segment represented approximately 29.7% of our consolidated net sales for the year ended 2016.

Our print segment primarily caters to the consumer products, automotive, travel and leisure and telecommunications industries. We provide a wide array of print offerings to our customers including electronic prepress, digital asset archiving, direct-to-plate technology, high-quality color printing on web and sheet-fed presses, digital printing and content management. The broad selection of print products we produce includes car brochures, annual reports, direct mail products, advertising literature, corporate identity materials and brand marketing materials. Our content management business offers complete solutions, including: editing, content processing, content management, electronic peer review, production, distribution and reprint marketing.

Label. We are a leading label manufacturer and one of the largest North American prescription label manufacturers for retail pharmacy chains. Our label segment had net sales of $301.4 million and $322.1 million and operating income of $30.5 million and $39.5 million for the years ended 2016 and 2015, respectively. Total assets for our label segment were $216.6 million and $223.5 million as of the years ended 2016 and 2015, respectively. Our label segment represented approximately 18.2% of our consolidated net sales for the year ended 2016.

Our label segment produces a diverse line of custom labels for a broad range of industries including manufacturing, warehousing, packaging, food and beverage, and health and beauty, which we sell through extensive networks within the resale channels. We provide direct mail and overnight packaging labels, food and beverage labels, and shelf and scale labels for national and regional customers. We produce pressure-sensitive prescription labels for the retail pharmacy chain market.

The primary methods of distribution of the principal products for our three segments are by freight carriers, direct shipment via express mail and the United States postal system.

Acquisitions and Divestitures

Acquisitions

On August 7, 2015, we acquired certain assets of Asendia USA, Inc., which we refer to as Asendia. The acquired assets provide letter shop, data processing, bindery and digital printing offerings.

We may, from time to time, complete acquisitions in areas we believe will strengthen our manufacturing platform, improve our operating margin performance or provide additional product offerings.

See Note 2 to our consolidated financial statements for further discussion regarding our acquisitions.

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Divestitures

During 2015, we began actively moving forward with our plan to review and potentially divest certain non-strategic assets that did not fit within our long-term strategy. As a result of this strategic review, during the first quarter of 2016, we completed the sale of our folded carton and shrink sleeve packaging businesses, along with our top-sheet lithographic print operation, which we refer to as the Packaging Business. The financial results of the Packaging Business have been accounted for as discontinued operations. Our historical, consolidated financial statements have been retroactively adjusted to give recognition to the discontinued operations for all periods presented. See Note 3 to our consolidated financial statements for further discussion regarding our discontinued operations.

Our Business Strategy

Our business strategy has been, and continues to be, focused on improving our operating margins, improving our capital structure and providing quality product offerings to our customers. We also are continuing to review options for our non-strategic assets and product lines. We also continue to make strategic investments and focused capital expenditures. The strategic investments focus on improving our e-commerce customer experience. Our focused capital expenditures in label equipment included two new digital presses added in both 2016 and 2015 and the initiation of a multi-phased, multi-year plan to reinvest into state-of-the-art labeling equipment, which should significantly increase our capabilities, minimize machine downtime and allow for margin expansion within our label operations.

Improving Operating Margins

In 2014, we substantially completed our integration of certain assets of National Envelope Corporation, which we refer to as National, which allowed us to focus on profitability improvement and other cost reduction actions in our envelope platform throughout 2015 and into early 2016. We believe the accelerated integration plan we completed during 2014 has provided meaningful improvements in our envelope segment's operating results during 2015 and 2016, as we realized significant increases in gross profit and operating income, as compared to 2014.

During 2016, we experienced significant sales volume decline and increased price pressures within our office product envelope and related wholesale envelope product lines due to measures undertaken by our customers in those product lines as a result of a regulatory decision mid-way through our 2016 fiscal year. In reaction to this decline and other continued marketplace challenges within our industry, we initiated a two year $50 million cost savings and profitability plan, which we refer to as the 2017 Profitability Improvement Plan, to offset the impact of these marketplace challenges and continue to improve our operating margins. With this plan, we expect higher restructuring, impairment and other charges primarily resulting from severance expense, facility rationalization costs and impairments associated with equipment footprint reductions. We believe these incremental charges will ultimately be offset by improved gross profit margins and lower selling, general and administrative expenses as we operate through 2017 and into 2018; however, this cannot be assured. These actions are aimed to reduce our fixed cost infrastructure, back office headcount and further streamline our geographic footprint. We believe that despite the facility rationalization, we will still be able to serve our national customer base with less facilities at the same or improved service levels that they are used to receiving from us.

Improving our Capital Structure

Since the beginning of 2012, we have been focused on improving our capital structure through a number of initiatives including working capital improvements, exiting underperforming or non-strategic businesses, and taking advantage of strategic refinancing opportunities and attractive leveraged loan and high yield debt market conditions. We have been able to accomplish this while reinvesting cash into our businesses via three acquisitions and focused capital expenditures. In connection with these activities, through the end of 2016, we continued to successfully reduce our outstanding debt and weighted average interest rate, which we believe will result in annual cash interest savings of approximately $40 million in 2017 as compared to 2012. Additionally, we have called for redemption during the first quarter of 2017 the remaining $20.5 million of our 11.5% senior notes due 2017, which we refer to as the 11.5% Notes. That addresses all but $5.5 million of our debt maturing in 2017. We expect that remaining $5.5 million of our 7% senior exchangeable notes due 2017, which we refer to as the 7% Notes, will be addressed prior to or at maturity in May of 2017. These redemptions or retirements will be made using cash flow from operations or availability under our asset-based revolving credit facility due 2021, which we refer to as the ABL Facility.


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Provide Quality Product Offerings

We conduct regular reviews of our product offerings, manufacturing processes and distribution methods to ensure that they meet the changing needs of our customers. We are also investing in digital and variable technology in particular, as we have seen increased customer demand for these technologies. Additionally, we have expanded our managed services portfolio and integrated customer supply chain capabilities via strategic investments in information technology and knowledge product specialists. By expanding our product offerings, we intend to increase cross-selling opportunities to our existing customer base and mitigate the impact of any decline in a given market or product.

Our Industry

The overall industry for print-related products is highly fragmented with excess capacity. We face price sensitivity and price pressures in many of our businesses. In the envelope market, we compete primarily with a few multi-plant and many single-plant companies servicing regional and local markets. In the commercial printing market, we compete against a few large, diversified and financially stronger printing companies, as well as smaller regional and local commercial printers, many of which are capable of competing with us on volume, price and production quality.  

The information set forth below is applicable to the operating environments within all our segments.

Raw Materials

The primary materials used in our businesses are paper, ink, film, offset plates and chemicals, with paper accounting for the majority of total material costs. We purchase these materials from a number of key suppliers and have not experienced any significant difficulties in obtaining the raw materials necessary for our operations. However, in times of limited supply, we have occasionally experienced minor delays in delivery. We believe we purchase our materials and supplies at competitive prices, primarily due to the size and scope of our purchasing power; however, our businesses are sensitive to pressure related to increases in the cost of materials used in the production of our products.

Patents, Trademarks and Trade Names

Our sales do not materially depend upon any single patent or group of related patents; however, we do market products under a number of trademarks and trade names. We also hold or have rights to use various patents relating to our businesses. Our patents expire between 2018 and 2032 and our trademarks expire between 2017 and 2030.

Seasonality 

Our envelope market and certain segments of the direct mail market have historically experienced seasonality with a higher percentage of volume of products sold to these markets during the third and fourth quarters of the year, primarily related to back-to-school campaigns and holiday purchases.

Our print plants experience seasonal variations. Revenues associated with consumer publications, such as holiday catalogs and automobile brochures tend to be concentrated from July through October. Revenues associated with the educational and scholastic market and promotional materials tend to decline in the summer. As a result of these seasonal variations, some of our print operations operate at or near capacity at certain times throughout the year.

Our custom label business has historically experienced a seasonal increase in net sales during the first and second quarters of the year, primarily resulting from the release of our product catalogs to the trade channel customers and our customers’ spring advertising campaigns. Our prescription label business has historically experienced seasonality in net sales due to cold and flu seasons, generally concentrated in the fourth and first quarters of the year. As a result of these seasonal variations, some of our label operations operate at or near capacity at certain times throughout the year.

Backlog

Backlog generally is not considered a significant factor in our business due to the relatively short delivery periods and frequent inventory turnover many of our businesses experience. Our backlog of customer orders to be produced or shipped was approximately $87.4 million and $104.9 million as of the years ended 2016 and 2015, respectively.


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Competition

We compete with a few multi-plant and many single-plant companies which primarily service regional and local markets in selling our envelope products. We also face competition from alternative sources of communication and information transfer such as electronic mail, the internet, interactive television and electronic retailing. Although these sources of communication and advertising may eliminate some domestic envelope sales in the future, we believe we will experience continued demand for envelope products due to: (i) the ability of our customers to obtain a relatively low-cost information delivery vehicle that may be customized with text, color, graphics and action devices to achieve the desired presentation effect; (ii) the ability of our direct mail customers to penetrate desired markets as a result of the widespread delivery of mail to residences and businesses through the United States Postal Service; and (iii) the ability of our direct mail customers to include return materials inside their mailings. Principal competitive factors in the envelope business are quality, service and price. Although all three factors are equally important, various customers may emphasize one or more over the others.

In selling our commercial print product offerings, we compete with large multinational commercial printing companies, as well as regional and local printers. The commercial printing industry continues to have excess capacity, and is highly competitive in most of our product categories and geographic regions. This excess capacity has resulted in a competitive pricing environment, in which companies have focused on reducing costs in order to preserve operating margins. Competition is based largely on price, quality and servicing the special requirements of customers. We believe this environment, combined with recent economic trends, will continue to lead to more consolidation within the commercial print industry as companies seek economies of scale, broader customer relationships, geographic coverage and product breadth to overcome or offset excess industry capacity and pricing pressures.

In selling our printed labels products, we compete with other label manufacturers with nationwide locations as well as regional and local printers that typically sell within a few hundred mile radius of their plants. Printed labels competition is based mainly on quick-turn customization, quality of products, pricing and customer service levels.

Employees

We employed approximately 7,300 people worldwide as of the year ended 2016, approximately 23% of whom were members of various local labor unions. Collective bargaining agreements, each of which cover the workers at a particular facility, expire from time to time and are negotiated separately. Accordingly, we believe no single collective bargaining agreement is material to our operations as a whole.

Environmental Regulations

Our operations are subject to federal, state, local and foreign environmental laws and regulations, including those relating to air emissions, waste generation, handling, management and disposal, and remediation of contaminated sites. We have implemented environmental programs designed to ensure that we operate in compliance with the applicable laws and regulations governing environmental protection. We believe we are in substantial compliance with applicable laws and regulations relating to environmental protection, and we do not anticipate material capital expenditures will be required to achieve or maintain compliance with environmental laws and regulations. However, there can be no assurance that newly discovered conditions, or new laws and regulations or stricter interpretations of existing laws and regulations, will not result in increased compliance or remediation costs.

Executive Officers
The following presents a list of our executive officers, their age, present position, the year elected to their present position and other positions they have held during the past five years. Robert G. Burton, Jr. and Michael G. Burton are the sons of Robert G. Burton, Sr. There are no undisclosed arrangements or understandings pursuant to which any person was selected as an officer. This information is presented as of the date of the Form 10-K filing.

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Name
 
Age
 
Position
 
Year
Elected to
Present
Position
Robert G. Burton, Sr.
 
76

 
Chairman and Chief Executive Officer
 
2005
Robert G. Burton, Jr.
 
41

 
President
 
2011
Scott J. Goodwin
 
39

 
Chief Financial Officer
 
2012
Michael G. Burton
 
39

 
Chief Operating Officer
 
2014
Ian R. Scheinmann
 
48

 
Senior Vice President, Legal Affairs and Corporate Secretary
 
2010/2015

Robert G. Burton, SrMr. Burton, 76, has been Cenveo’s Chairman and Chief Executive Officer since September 2005. In January 2003, he formed Burton Capital Management, LLC, a company which invests in manufacturing companies, and has been its Chairman, Chief Executive Officer and sole managing member since its formation. From December 2000 through December 2002, Mr. Burton was the Chairman, President, and Chief Executive Officer of Moore Corporation Limited, a leading printing company with over $2.0 billion in revenue for fiscal year 2002. Preceding his employment at Moore, Mr. Burton was Chairman, President, and Chief Executive Officer of Walter Industries, Inc., a diversified holding company. From April 1991 through October 1999, he was the Chairman, President, and Chief Executive Officer of World Color Press, Inc., a $3.0 billion diversified printing company. From 1981 through 1991, he held a series of senior executive positions at Capital Cities/ABC, including President of ABC Publishing. Mr. Burton was also employed for 10 years as a senior executive of SRA, the publishing division of IBM.

Robert G. Burton, Jr. Mr. Burton, Jr., 41, has served as Cenveo’s President since August 2011. From December 2010 to August 2011, Mr. Burton was President of Corporate Operations, with a primary focus on Mergers and Acquisitions, Treasury, Information Technology, Human Resources, Legal and Investor Relations. From September 2005 to December 2010, Mr. Burton was Executive Vice President of Investor Relations, Treasury, Human Resources and Legal at Cenveo. He has been a member of the Chairman’s Executive Committee since joining Cenveo. From 2004 to 2005, Mr. Burton was also President of Burton Capital Management, LLC and was the primary investment officer before he joined Cenveo on September 2005. Mr. Burton has over 16 years of business experience as an Investor Relations, Mergers and Acquisitions, and financial professional. Mr. Burton also served as the Senior Vice President, Investor Relations and Corporate Communications for Moore Wallace Incorporated (and its predecessor, Moore Corporation) from December 2001 to May 2003. Mr. Burton served as Vice President, Investor Relations of Walter Industries in 2000. From 1996 through December 1999, Mr. Burton held various management positions at World Color Press, Inc., including Vice President, Investor Relations. Mr. Burton earned a B.A. degree from Vanderbilt University.

Scott J. Goodwin. Mr. Goodwin, 39, has served as Cenveo's Chief Financial Officer since August 2012 and was Chief Accounting Officer from April 2012 to August 2012. From June 2009 to April 2012, Mr. Goodwin served as Cenveo's Corporate Controller. Mr. Goodwin joined Cenveo as its Assistant Corporate Controller in June 2006. Prior to joining Cenveo, Mr. Goodwin spent seven years in public accounting at Deloitte & Touche LLP. Mr. Goodwin is a Certified Public Accountant and received his degree in accounting from The Citadel.

Michael G. Burton. Mr. Burton, 39, has served as Cenveo’s Chief Operating Officer since July 2014. From July 2013 to July 2014, Mr. Burton served as President, Print, Label and Packaging Group. In November 2010 Mr. Burton became President of the Label division and subsequently became responsible for the Packaging division in January 2012. From September 2005 to November 2010, Mr. Burton was Senior Vice President, Operations with a primary focus on, Procurement, Information Technology, Environmental Health and Safety, and Human Resources. From 2003 to 2005, Mr. Burton was also Executive Vice President, Operations of Burton Capital Management, LLC. He was a founding member of this group before he joined Cenveo on September 2005. Mr. Burton was previously Vice President of Commercial and Subsidiary Operations, a $600 million division of Moore Corporation Limited. Mr. Burton received his B.A. degree from the University of Connecticut where he was captain of the football team.

Ian R. Scheinmann. Mr. Scheinmann, 48, has served as Cenveo’s Senior Vice President, Legal Affairs since August 2010. From May 2010 until August 2010, he served as Cenveo’s in-house real estate counsel. He has also served as Cenveo’s Corporate Secretary since June 2015. Prior to joining Cenveo, Mr. Scheinmann was Cenveo’s outside real estate counsel as a member of Rudoler & DeRosa, LLC where his practice covered a wide range of real estate and business transactions. Prior to joining Rudoler & DeRosa, Mr. Scheinmann was a real estate shareholder with Greenberg Traurig, LLP from August 2002 until March 2009. From 1995 until 2002, he was engaged in private practice with (i) Dilworth Paxson, LLP (September 2000 until July 2002); (ii) Anderson, Kill and Olick, P.C. (November 1996 until May 2000); and (iii) Weiner Lesniak (October 1995 until October

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1996). Mr. Scheinmann received his B.S.B.A. from the John M. Olin School of Business at Washington University, St. Louis, Missouri and his J.D. with honors from Seton Hall University School of Law.

Cautionary Statements

Certain statements in this report, particularly statements found in "Risk Factors," "Business" and "Management’s Discussion and Analysis of Financial Condition and Results of Operations," may constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. In addition, we or our representatives have made or continue to make forward-looking statements, orally or in writing, in other contexts. These forward-looking statements generally can be identified by the use of terminology such as "may," "will," "expect," "intend," "estimate," "anticipate," "plan," "foresee," "believe" or "continue" and similar expressions, or as other statements which do not relate solely to historical facts. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions which are difficult to predict or quantify. Management believes these statements to be reasonable when made. However, actual outcomes and results may differ materially from what is expressed or forecasted in these forward-looking statements. As a result, these statements speak only as of the date they were made. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. In view of such uncertainties, investors should not place undue reliance on our forward-looking statements.

Such forward-looking statements involve known and unknown risks, including, but not limited to, those identified in "Risk Factors," along with changes in general economic, business and labor conditions. More information regarding these and other risks can be found below under "Risk Factors" in Item 1A, "Business," "Management’s Discussion and Analysis of Financial Condition and Results of Operations" and other sections of this report.

Available Information

Our internet address is: www.cenveo.com. References to our website address do not constitute incorporation by reference of the information contained on the website, and the information contained on the website is not part of this document. We make available free of charge through our website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed pursuant to the Securities Exchange Act of 1934, as amended, which we refer to as the Exchange Act, as soon as reasonably practicable after such documents are filed electronically with the Securities and Exchange Commission, which we refer to as the SEC. Our Code of Business Conduct and Ethics is also posted on our website. In addition, our earnings conference calls are archived for replay on our website. In August 2016, we submitted to the New York Stock Exchange, which we refer to as the NYSE, a certificate of our Chief Executive Officer certifying he is not aware of any violation by us of NYSE corporate governance listing standards. See further discussion in "Risk Factors" in Item 1A. We also filed as exhibits to our annual report on Form 10-K for our year ended 2015 certificates of the Chief Executive Officer and Chief Financial Officer as required under Section 302 of the Sarbanes-Oxley Act.

The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. The public may obtain information about the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site (http://www.sec.gov) which contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC.

Item 1A.   Risk Factors

Many factors which affect our business and operations involve risks and uncertainties. The factors described below are some of the risks that could materially harm our business, financial conditions, results of operations or prospects.

Our substantial level of indebtedness could materially adversely affect our financial condition, liquidity and ability to service or refinance our debt, and prevent us from fulfilling our business obligations.

We currently have a substantial amount of outstanding indebtedness, which requires significant principal and interest payments. Approximately $30 million of this indebtedness matures in the next six months. As of our year ended 2016, our total indebtedness was approximately $1.0 billion, principally comprised of $20.5 million outstanding principal amount of 11.5% Notes; $5.5 million outstanding principal amount of 7% Notes; $540.0 million outstanding principal amount of 6.000% senior priority secured notes due 2019, which we refer to as the 6.000% Secured Notes; $81.7 million outstanding principal amount under the ABL Facility; $50.0 million outstanding principal amount of 4% senior secured notes due 2021, which we refer to as the 4% Secured Notes; $241.0 million outstanding principal amount of 8.500% junior priority secured notes due 2022, which we refer to as the 8.500% Notes; and $104.5 million outstanding principal amount of 6.000% senior unsecured notes due 2024, which we refer to as the 6.000% Unsecured Notes.

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Our substantial level of indebtedness and the maturities thereof could also materially adversely affect our future operations, by, for example:

requiring a substantial portion of our cash flow from operations to be dedicated to the payment of principal and interest on indebtedness thereby reducing the availability of our cash flow to fund working capital, capital expenditures, acquisitions and other business purposes;
making it more difficult for us to satisfy all of our debt obligations, thereby increasing the risk of triggering a cross-default provision;
increasing our vulnerability to economic downturns or other adverse developments relative to less leveraged competitors;
limiting our ability to obtain additional financing for working capital, capital expenditures, acquisitions or other corporate purposes in the future;
increasing our cost of borrowing to satisfy business needs; or
requiring refinancing, the successful completion of which cannot be assured.

Our ability to pay the principal of, or to reduce or refinance, our outstanding indebtedness depends on many factors.

The 11.5% Notes and 7% Notes are scheduled to mature in May 2017, the 6.000% Secured Notes are scheduled to mature in August 2019, the ABL Facility is scheduled to mature in June 2021 (with a springing maturity of May 2019 in the event that more than $10 million of the 6.000% Secured Notes remain outstanding at such time), the 4% Secured Notes are scheduled to mature in December 2021, the 8.500% Notes are scheduled to mature in September 2022, and the 6.000% Unsecured Notes are scheduled to mature in May 2024. As noted above, we have called the remaining 11.5% Notes for redemption during the first quarter of 2016 and expect that the remaining $5.5 million of our 7% Notes will be addressed prior to or at maturity in May of 2017, all of which will be made using cash flow from operations or availability under our ABL Facility. Our ability to make scheduled payments on, or to reduce or refinance, our indebtedness will depend on our future financial and operating performance, and prevailing market conditions. Further, the use of cash for redemptions and maturities noted above reduces the availability of that cash for ongoing operations and future debt service, which increases the risk that at any time our available cash may be inadequate as needed, which risk would be exacerbated by a downturn in results of operations and cash flow. Our future performance will be affected by the impact of general economic, financial, competitive and other factors beyond our control, including the availability of financing in bank and capital markets. We cannot be certain our business will generate sufficient cash flow from operations in an amount necessary to service our debt. If we are unable to meet our debt obligations or to fund our other liquidity needs, we may be required to restructure or refinance all, or a portion of, our debt to avoid defaulting on our debt obligations or to meet other business needs. Such a refinancing of our indebtedness could result in higher interest rates, could require us to comply with more onerous covenants further restricting our business operations, could be restricted by another one of our debt instruments outstanding, or refinancing opportunities may not be available at all.

In connection with improving our capital structure through a number of initiatives, including working capital improvements, exiting underperforming, non-strategic or other businesses, and taking advantage of strategic refinancing opportunities and attractive leveraged loan and high yield debt market conditions, through the end of 2016 we reduced our outstanding debt and weighted average interest rate, which we believe will result in annual cash interest savings of approximately $40 million in 2017 as compared to 2012. There can be no assurances that these or other expected savings will be realized or that intervening developments will not occur to offset these savings.

The terms of our indebtedness impose significant restrictions on our operating and financial flexibility.

The agreements governing our outstanding indebtedness contain a number of significant restrictions and covenants which limit our ability (subject in each case to limited exceptions) to, among other things:

incur or guarantee additional indebtedness;
make restricted payments, including dividends and prepaying indebtedness;
create or permit certain liens;
enter into business combinations and asset sale transactions;
make investments, including capital expenditures;
amend organizational documents and change accounting methods;
enter into transactions with affiliates; and
enter into new businesses.

These restrictions could limit our ability to obtain future financing, make acquisitions or incur needed capital expenditures, withstand a future downturn in our business or the economy in general, conduct operations or otherwise take advantage of business

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opportunities which may arise.

The ABL Facility also contains a negative covenant restricting dispositions, including dispositions the aggregate book value of which exceeds $35.0 million. Such dispositions are permitted, however, if within 360 days after the receipt of any net proceeds from such dispositions, we apply all of the net proceeds thereof: (i) to be reinvested in our business; (ii) to repay obligations under the ABL Facility under certain circumstances; or (iii) to make an offer to purchase the 6.000% Secured Notes. Each of the indentures governing the 6.000% Secured Notes, 8.500% Notes, 11.5% Notes and 6.000% Unsecured Notes and the indenture and note purchase agreement governing the 4% Secured Notes also contains a negative covenant requiring us to apply any net proceeds from an asset sale: (i) to be reinvested in our business; (ii) to repay certain of our indebtedness; or (iii) to make an offer to purchase the 6.000% Secured Notes, 8.500% Notes, 11.5% Notes, 6.000% Unsecured Notes or 4% Secured Notes, respectively. On January 19, 2016, we completed the sale of our Packaging Business, realizing total net cash proceeds of approximately $89.6 million. We have satisfied the reinvestment requirements set forth in our debt agreements with respect to such net cash proceeds.

In addition, the ABL Facility contains a minimum consolidated fixed charge coverage ratio with which, under certain circumstances, we must comply on a quarterly basis. Our ability to meet such fixed charge coverage ratio may be affected by events beyond our control, such as further deterioration in general economic conditions. We are also required to provide certain financial information on a quarterly basis. Our failure to maintain the fixed charge coverage ratio or effective internal controls could, in certain circumstances, prevent us from borrowing additional amounts, and could result in a default under the ABL Facility. Such a default could cause the indebtedness outstanding under the ABL Facility, and, by reason of cross-acceleration or cross-default provisions, the 6.000% Secured Notes, the 8.500% Notes, the 11.5% Notes, the 6.000% Unsecured Notes, the 4% Secured Notes and the 7% Notes, and any other indebtedness we may then have, to become immediately due and payable for which we would not have sufficient resources to satisfy.

If any such defaults occur and if we are unable to repay those amounts, the lenders under the ABL Facility, the indentures governing the 6.000% Secured Notes and 8.500% Notes and the indenture and note purchase agreement governing the 4% Secured Notes could initiate a bankruptcy or liquidation proceeding, or proceed against the collateral granted to them which secures that indebtedness. If the lenders under the ABL Facility and/or indentures governing the 6.000% Secured Notes and/or 8.500% Notes and/or the indenture and note purchase agreement governing the 4% Secured Notes were to accelerate the repayment of outstanding borrowings, we would not have sufficient resources to repay our indebtedness.

If we are able to incur additional borrowings, such borrowings could further exacerbate our risk exposure from debt.

Our 8.500% Notes indenture, 6.000% Secured Notes indenture, 6.000% Unsecured Notes indenture, 4% Secured Notes indenture and note purchase agreement, credit agreement governing our ABL Facility and our other debt instruments limit, but do not prohibit, us from incurring additional debt. If we are able to incur additional borrowings, the risks associated with our substantial leverage would increase.

United States and global economic conditions have adversely affected us and could continue to adversely affect us.
    
The United States and global economic conditions affect our results of operations and financial position. A significant part of our business relies on our customers’ printing spend. A prolonged downturn in the global economy and an uncertain economic outlook could further reduce the demand for printed materials and related offerings that we provide our customers. Consequently, reductions or delays in our customers’ spending could adversely impact our results of operations, financial position and cash flows. We believe any extended economic uncertainty will impact our operating results.

To the extent that we make select acquisitions, we may not be able to successfully integrate the acquired businesses into our business.

In the past, we have grown rapidly through acquisitions. We intend to continue to pursue select acquisition opportunities within our core and niche businesses. To the extent we seek to pursue additional acquisitions, we cannot be certain target businesses will be available on favorable terms or that, if we are able to acquire businesses on favorable terms, we will be able to successfully integrate or profitably manage them. Successfully integrating an acquisition involves minimizing disruptions and efficiently managing substantial changes, some of which may be beyond our control. An acquisition always carries the risk that such changes, including facility and equipment location, management and employee base, policies, philosophies and procedures, could have unanticipated effects, could require more resources than intended and could cause customers to temporarily or permanently seek alternate suppliers. A failure to realize acquisition synergies and savings could negatively impact the results of both our acquired and existing operations. Further, our ability to make acquisitions in the future will be limited by the availability to us of cash for that purpose.


9



A decline in our consolidated profitability or profitability within one of our individual reporting units could result in the impairment of assets, including goodwill and other long-lived assets.

We have material amounts of goodwill and other long-lived assets on our consolidated balance sheet. A decline in expected profitability, particularly the impact of an extended uncertainty in the United States and global economies, could call into question the recoverability of our related goodwill and other long-lived assets and require us to write down or write-off these assets.

The industries in which we operate our business are highly competitive and extremely fragmented.

The industries in which we compete are highly competitive and extremely fragmented. In the envelope market, we compete primarily with a few multi-plant and many single-plant companies servicing regional and local markets. In the commercial printing market, we compete against a few large, diversified and financially stronger printing companies, as well as smaller regional and local commercial printers, many of which are capable of competing with us on volume, price and production quality. We believe there currently is excess capacity in the industries in which we operate, which has resulted in substantial price competition which may continue as customers put product work out for competitive bid. We are constantly seeking ways to reduce our costs, become more efficient and attract customers. We cannot, however, be certain these efforts will be successful or our competitors will not be more successful in their similar efforts. If we fail to reduce costs and increase productivity, or to meet customer demand for new value-added products, services or technologies, we may face decreased revenues and profit margins in markets where we encounter price competition, which in turn could reduce our cash flow and profitability.

The printing business we compete in generally does not have long-term customer agreements, and our printing operations may be subject to quarterly and cyclical fluctuations.

The printing industry in which we compete is generally characterized by individual orders from customers or short-term contracts. A significant portion of our customers are not contractually obligated to purchase products or services from us. Most customer orders are for specific printing jobs, and repeat business largely depends on our customers’ satisfaction with our work product. Although our business does not depend on any one customer or group of customers, we cannot be sure that any particular customer will continue to do business with us for any period of time. In addition, the timing of particular jobs or types of jobs at particular times of year may cause significant fluctuations in the operating results of our operations in any given quarter. We depend to some extent on sales to certain industries, such as the financial services, advertising, pharmaceutical, automotive and office products industries. To the extent these industries experience downturns, the results of our operations may be adversely affected.

Factors affecting the United States Postal Service can impact demand for our products.

Postal costs are a significant component of many of our customers’ cost structure. Historically, increases in postal rates have resulted in reductions in the volume of mail sent, including direct mail, which is a meaningful portion of our envelope volume. As postal rate increases in the United States are outside our control, we can provide no assurance that any future increases in United States postal rates will not have a negative effect on the level of mail sent or the volume of envelopes purchased.  

Factors other than postal rates which affect the volume of mail sent through the United States postal system may also negatively affect our business. Congress enacted a federal "Do Not Call" registry in response to consumer backlash against telemarketers. If similar legislation becomes enacted for direct mail advertisers, our business could be adversely affected. Additionally, the United States Postal Service has also indicated the potential need to reduce delivery days. We can provide no assurance that such a change would not impact our customers’ decisions to use direct mail products, which may in turn cause a decrease in our revenues and profitability; however, we do not expect such an impact.

The availability of the internet and other electronic media may adversely affect our business.

Our business is highly dependent upon the demand for envelopes sent through the mail. Such demand comes from utility companies, banks and other financial institutions, among other companies. Our printing business also depends upon demand for printed advertising among other products. Consumers increasingly use the internet and other electronic media to purchase goods and services, and for other purposes, such as paying bills and obtaining electronic versions of printed product. The level of acceptance of electronic media by consumers as well as the extent that consumers are replacing traditional printed reading materials with internet hosted media content or e-reading devices is difficult to predict. Advertisers use the internet and other electronic media for targeted campaigns directed at specific electronic user groups. We cannot be certain the acceleration of the trend towards electronic media will not cause a decrease in the demand for our products. If demand for our products decreases, our cash flow or profitability could materially decrease.


10



Increases in paper costs and any decreases in the availability of our raw materials could have a material effect on our business.

Paper costs represent a significant portion of our cost of materials. Changes in paper pricing generally do not affect the operating margins of our commercial printing business, because the transactional nature of the business allows us to pass on most announced increases in paper prices to our customers. However, our ability to pass on increases in paper prices is dependent upon the competitive environment at any given time. Paper pricing also affects the operating margins of our envelope business. We have historically been less successful in immediately passing on such paper price increases due to several factors, including contractual restrictions in certain cases and the inability to quickly update catalog prices in other instances. Moreover, rising paper costs, and their consequent impact on our pricing, could lead to a decrease in demand for our products.

We depend on the availability of paper in manufacturing most of our products. During periods of tight paper supply, many paper producers allocate shipments of paper based on the historical purchase levels of customers. In the past, we have occasionally experienced minor delays in delivery. Any future delay in availability could negatively impact our cash flow and profitability.

Increases in energy and transportation costs could have a material effect on our business.

Energy and transportation costs represent a large portion of our overall cost structure. Increases in the costs of these inputs may increase our overall costs. We may not be able to pass these costs on to our customers through higher prices. Increases in the cost of materials may adversely impact our customers’ demand for our products.

We depend on good labor relations.

As of our year ended 2016, we employed approximately 7,300 people worldwide, approximately 23% of whom were members of various local labor unions. If our unionized employees were to engage in a concerted strike or other work stoppage, or if other employees were to become unionized, we could experience a disruption of operations, higher labor costs or both. A lengthy strike could result in a material decrease in our cash flow or profitability.

Environmental laws may affect our business.

Our operations are subject to federal, state, local and foreign environmental laws and regulations, including those relating to air emissions, wastewater discharge, waste generation, handling, management and disposal, and remediation of contaminated sites. Currently unknown environmental conditions or matters at our existing and prior facilities, new laws and regulations, or stricter interpretations of existing laws and regulations could result in increased compliance or remediation costs which, if substantial, could have a material effect on our business or operations in the future.

We are dependent on key management personnel.

Our success will depend to a significant degree on our executive officers and other key management personnel. We cannot be certain we will be able to retain our executive officers and key personnel, or attract additional qualified management in the future. In addition, the success of any acquisitions we may pursue may depend, in part, on our ability to retain management personnel of the acquired companies. We do not carry key person insurance on any of our managerial personnel.

Our business could be materially adversely affected by any failure, interruption or security lapse of our information technology systems.

We are increasingly dependent on information technology systems to process transactions, manage inventory, purchase, sell and ship goods on a timely basis and maintain cost-efficient operations. We use information systems to support decision making and to monitor business performance. Our information technology systems depend on global communications providers, telephone systems, hardware, software and other aspects of internet infrastructure which can experience significant system failures and outages. Our systems are susceptible to outages due to fire, floods, power loss, telecommunications failures and similar events. Despite the implementation of network security measures, our systems are vulnerable to computer viruses and similar disruptions from unauthorized tampering with our systems. In addition, cybersecurity threats are evolving and include, but are not limited to, malicious software, attempts to gain unauthorized access to data, denial of service attacks and other electronic security breaches which could lead to disruptions in critical systems, unauthorized release of confidential or otherwise protected information and corruption of data. The occurrence of these or other events could disrupt or damage our information technology systems and inhibit internal operations, the ability to provide customer service or provide management with accurate financial and operational information essential for making decisions at various levels of management.


11



Item 1B.   Unresolved Staff Comments

None.

Item 2. Properties

We currently occupy 44 manufacturing facilities within our continuing operations, primarily in North America, of which 14 are owned and 30 are leased. We lease our corporate headquarters space in Stamford, Connecticut and we lease additional facilities for our sales and support teams. We believe we have adequate facilities to conduct our current and future operations.

Item 3. Legal Proceedings

From time to time we may be involved in claims or lawsuits that arise in the ordinary course of business. Accruals for claims or lawsuits have been provided for to the extent losses are deemed probable and estimable. Although the ultimate outcome of these claims or lawsuits cannot be ascertained, on the basis of present information and advice received from counsel, it is our opinion that the disposition or ultimate determination of such claims or lawsuits will not have a material effect on our consolidated financial statements.

In the case of administrative proceedings related to environmental matters involving governmental authorities, we do not believe that any imposition of monetary damages or fines would be material.
Item 4. Mine Safety Disclosures
Not applicable.

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PART II
Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
The certificate of incorporation, as amended, of Cenveo states that the total authorized capital stock is 15 million shares of common stock, $0.01 par value per share, which we refer to as Common Stock. Each share of voting Common Stock is entitled to one vote in respect of each share of Cenveo voting Common Stock held of record on all matters submitted to a vote of stockholders.

On July 8, 2016, we announced a reverse split of our Common Stock, at a ratio of 1-for-8, effective July 13, 2016, which we refer to as the Reverse Stock Split. The Common Stock began trading on a split-adjusted basis on July 14, 2016. The Reverse Stock Split was approved by our stockholders at the annual meeting of the stockholders held on May 26, 2016. As a result of the Reverse Stock Split, each eight pre-split shares of Common Stock outstanding were automatically combined into one new share of Common Stock without any action on the part of the respective holders, and the number of outstanding common shares on the date of the split was reduced from approximately 68.5 million shares to approximately 8.5 million shares. The Reverse Stock Split also applied to Common Stock issuable upon the exchange of our outstanding 7% Notes and upon the exercise of our outstanding warrants. Additionally, the Reverse Stock Split applied to our outstanding stock options, restricted share units, which we refer to as RSUs, and performance share units, which we refer to as PSUs; collectively which we refer to as the Equity Awards. In addition, the authorized Common Stock was initially increased from 100 million to 120 million shares and then adjusted in the Reverse Stock Split from 120 million to 15 million shares. Our historical consolidated financial statements have been retroactively adjusted to give recognition to the Reverse Stock Split for all periods presented.
Our Common Stock is traded on the NYSE under the symbol "CVO." As of January 26, 2017, there were 318 shareholders of record and, as of that date, we estimate there were approximately 8,253 beneficial owners holding stock in nominee or "street" name. The following table sets forth, for the periods indicated, the range of the high and low closing prices for our Common Stock as reported by the NYSE:

2016
High
 
Low
First Quarter                                                                                           
$
7.20

 
$
2.88

Second Quarter                                                                                           
8.96

 
2.96

Third Quarter                                                                                           
9.80

 
5.52

Fourth Quarter                                                                                           
8.32

 
6.66

 
 
 
 
2015
High
 
Low
First Quarter                                                                                           
$
17.44

 
$
14.80

Second Quarter                                                                                           
20.64

 
15.68

Third Quarter                                                                                           
17.76

 
12.24

Fourth Quarter                                                                                           
16.24

 
6.80

We have not paid a dividend on our Common Stock since our incorporation and do not anticipate paying dividends in the foreseeable future as the instruments governing a portion of our debt obligations limit our ability to pay Common Stock dividends.

For each of the years ended 2016 and 2015, we had 25,000 shares of preferred stock authorized, of which no shares were issued or outstanding.
See Note 12 to our consolidated financial statements for information regarding our stock-based compensation plans. Compensation information required by Item 11 will be presented in our 2017 definitive proxy statement, which is incorporated herein by reference.





13


The graph below compares five-year returns of our Common Stock with those of the S&P 500 Index and the S&P 1500 Commercial Printing Index. The graph assumes that $100 was invested as of our year ended 2011 in each of our Common Stock, the S&P 500 Index, and the S&P 1500 Commercial Printing Index and that all dividends were reinvested. The S&P 1500 Commercial Printing Index is a capitalization weighted index designed to measure the performance of all NYSE-traded stocks in the commercial printing sector.

 
Years Ended
 
2011
 
2012
 
2013
 
2014
 
2015
 
2016
 
Cenveo
100.00

 
79.41

 
101.18

 
61.77

 
25.63

 
25.70

 
S&P 500 Index
100.00

 
116.00

 
153.57

 
174.60

 
177.01

 
198.18

 
S&P 1500 Commercial Printing Index
100.00

 
90.39

 
183.77

 
188.15

 
170.18

 
206.87

 

cvo-2014122_charta01.jpg


14


Item 6.  Selected Financial Data
The following table sets forth our selected financial and operating data for the years ended December 31, 2016, January 2, 2016, December 27, 2014, December 28, 2013 and December 29, 2012, which we refer to as the years ended 2016, 2015, 2014, 2013 and 2012, respectively.
The following consolidated selected financial data has been derived from, and should be read in conjunction with, the related consolidated financial statements, either elsewhere in this report or in reports we have previously filed with the SEC. Additionally, it reflects the retroactive adjustment of amounts to give recognition to the discontinued operations for all periods presented for our Packaging Business, our Custom Envelope Group, our San Francisco manufacturing facility, our documents and forms business, and our wide-format papers business.
        
CENVEO, INC. AND SUBSIDIARIES
(in thousands, except per share data)
 
Years Ended
Statement of Operations:
2016
 
2015
 
2014
 
2013
 
2012
Net sales
$
1,660,001

 
$
1,741,779

 
$
1,761,315

 
$
1,588,702

 
$
1,544,073

Restructuring and other charges
11,954

 
12,576

 
21,526

 
12,586

 
26,066

Impairment of intangible assets

 

 

 
24,493

 

Operating income
76,032

 
83,793

 
42,774

 
32,041

 
80,214

(Gain) loss on early extinguishment of debt, net (1)
(82,481
)
 
1,252

 
27,449

 
11,324

 
12,487

Income (loss) from continuing operations (3)
70,846

 
(19,461
)
 
(95,053
)
 
(86,276
)
 
(94,321
)
(Loss) income from discontinued operations, net of taxes (2)(4)(5)
(2,897
)
 
(11,390
)
 
11,190

 
17,490

 
14,434

Net income (loss) (1)(2)(3)(4)(5)
67,949

 
(30,851
)
 
(83,863
)
 
(68,786
)
 
(79,887
)
Income (loss) per share from continuing operations:
 
 
 
 
 
 
 
 
 
Basic
8.31

 
(2.30
)
 
(11.36
)
 
(10.69
)
 
(11.87
)
Diluted
7.63

 
(2.30
)
 
(11.36
)
 
(10.69
)
 
(11.87
)
(Loss) income per share from discontinued operations:
 
 
 
 
 
 
 
 
 
Basic
(0.34
)
 
(1.34
)
 
1.34

 
2.17

 
1.82

Diluted
(0.31
)
 
(1.34
)
 
1.34

 
2.17

 
1.82

Net income (loss) per share:
 
 
 
 
 
 
 
 
 
Basic
7.97

 
(3.64
)
 
(10.02
)
 
(8.52
)
 
(10.05
)
Diluted
7.32

 
(3.64
)
 
(10.02
)
 
(8.52
)
 
(10.05
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance Sheet data:
 
 
 
 
 
 
 
 
 
Total assets
$
912,959

 
$
1,082,026

 
$
1,135,721

 
$
1,195,316

 
$
1,179,156

Total long-term debt, including current maturities
1,018,666

 
1,208,623

 
1,210,380

 
1,166,784

 
1,160,835

__________________________

(1) 
During the year ended 2016, we completed several transactions which resulted in a net gain on early extinguishment of debt. See further detail in Note 8 to our consolidated financial statements.
(2) 
In connection with the sale of the Packaging Business, we recorded a gain on sale of $1.4 million for the year ended 2016 and a loss on sale of $5.0 million for the year ended 2015. Additionally, we recorded a non-cash goodwill impairment charge of $9.9 million related to this transaction for the year ended 2015.
(3) 
Includes $40.6 million and $56.5 million valuation allowance charges related to deferred tax assets for the years ended 2013 and 2012, respectively.
(4) 
Includes $14.9 million gain on sale of discontinued operations, net of tax expense of $10.7 million for the year ended 2013.
(5) 
Includes $6.3 million loss on sale of discontinued operations, net of tax benefit of $2.6 million for the year ended 2012.


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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
This Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our consolidated financial statements included in Item 8 of this Annual Report on Form 10-K, which we refer to as the Form 10-K. Cenveo, Inc. and its subsidiaries are referred to herein as "Cenveo," the "Company," "we," "our," or "us."
    
Certain statements we make in this report constitute forward-looking statements under the Private Securities Litigation Reform Act of 1995. See Cautionary Statements regarding forward-looking statements in Item 1, and "Risk Factors" in Item 1A.

Factors which could cause actual results to differ materially from management’s expectations include, without limitation: (i) our substantial level of indebtedness could materially adversely affect our financial condition, liquidity and ability to service or refinance our debt, and prevent us from fulfilling our business obligations; (ii) our ability to pay the principal of, or to reduce or refinance, our outstanding indebtedness; (iii) the terms of our indebtedness imposing significant restrictions on our operating and financial flexibility; (iv) additional borrowings available to us could further exacerbate our risk exposure from debt; (v) United States and global economic conditions have adversely affected us and could continue to adversely affect us; (vi) our ability to successfully integrate acquired businesses with our business; (vii) a decline in our consolidated profitability or profitability within one of our individual reporting units could result in the impairment of our assets, including goodwill and other long-lived assets; (viii) the industries in which we operate our business are highly competitive and extremely fragmented; (ix) a general absence of long-term customer agreements in our industry, subjecting our business to quarterly and cyclical fluctuations; (x) factors affecting the United States postal services impacting demand for our products; (xi) the availability of the Internet and other electronic media adversely affecting our business; (xii) increases in paper costs and decreases in the availability of raw materials; (xiii) increases in energy and transportation costs; (xiv) our labor relations; (xv) our compliance with environmental laws; (xvi) our dependence on key management personnel; and (xvii) any failure, interruption or security lapse of our information technology systems. This list of factors is not exhaustive, and new factors may emerge or changes to the foregoing factors may occur that would impact our business. Additional information regarding these and other factors can be found elsewhere in this report, and in our other filings with the Securities and Exchange Commission, which we refer to as the SEC.

Introduction and Executive Overview

We are a diversified manufacturing company focused on print-related products. Our broad portfolio of products includes envelope converting, commercial printing, and label manufacturing. We operate a global network of strategically located manufacturing facilities, serving a diverse base of customers ranging from Fortune 100 companies to individual consumers. Our business strategy has been, and continues to be, focused on improving our operating margins, improving our capital structure and providing quality product offerings to our customers. We operate our business in three complementary reportable segments: the envelope segment, the print segment and the label segment.

See Part 1, Item 1 of this Form 10-K for a more complete description of our business.

2016 Overview and 2017 Outlook

Generally, print-related industries remain highly fragmented and extremely competitive due to over-capacity and pricing pressures. We believe these factors, combined with uncertain economic conditions in the United States, will continue to impact our results of operations. However, we believe the diversification of our revenue and operating income along with the market dynamics that exist within certain markets in which we operate will provide an opportunity for us to have operating trends that perform better than certain other print dynamic markets.

Our current management focus is on the following areas:

Improving Operating Margins

In 2014, we substantially completed our integration of certain assets of National Envelope Corporation, which we refer to as National, which allowed us to focus on profitability improvement and other cost reduction actions in our envelope platform throughout 2015 and into early 2016. We believe the accelerated integration plan we completed during 2014 has provided meaningful improvements in our envelope segment's operating results during 2015 and 2016, as we realized significant increases in gross profit and operating income, as compared to 2014.

During 2016, we experienced significant sales volume decline and increased price pressures within our office product envelope and related wholesale envelope product lines due to measures undertaken by our customers in those product lines as a result of inventory management initiatives and continued closure of distribution centers and retail store fronts. We believe this

16



was accelerated during 2016 as a result of a regulatory decision mid-way through our 2016 fiscal year. The decline in our sales and operating income in these product lines were partially offset by increased demand for direct mail envelopes which contributed mid-single digit growth compared to prior year and increased operating income. Our commercial printing operations performed generally in line with our expectations in regards to both sales and operating income. Our label segment experienced sales declines primarily driven by our decision to exit our coating operation combined with lower sales in our long-run label product line due to decisions to exit lower margin product sets and lower than expected sales within our high margin custom label product sets. The operating margin of our label segment decreased primarily due to the lower sales volume in our high margin custom label business being partially offset by the benefits of the 2016 Label Transaction, as discussed further below.

With the decline in our office product envelope and related wholesale envelope product lines and other continued marketplace challenges within our industry, we initiated a two year $50 million cost savings and profitability plan, which we refer to as the 2017 Profitability Improvement Plan, to offset the impact of these marketplace challenges and continue to improve our consolidated operating margins. With this plan, we expect higher restructuring, impairment and other charges primarily resulting from severance expense, facility rationalization costs and impairments associated with equipment footprint reductions. We believe these incremental charges will ultimately be offset by improved gross profit margins and lower selling general and administrative expenses as we operate through 2017 and into 2018; however, this cannot be assured. These actions are aimed to reduce our fixed cost infrastructure, back office headcount and further streamline our geographic footprint. We believe that despite the facility rationalization, we will still be able to serve our national customer base with less facilities at the same or improved service levels that they are used to receiving from us.

During 2017, we expect sales in our envelope segment will continue to see similar direct mail growth trends consistent with the past several years, which will be offset by lower sales due to reduced purchasing patterns within our office product envelope and wholesale envelope product lines. We expect our commercial print sales to decline at a consistent rate similar to the past several years. We expect our label segment sales will decline slightly as we reach the anniversary of our decision to exit our coating operation, which we expect will be offset by increased sales within both our custom label and long-run label product lines.

Improving our Capital Structure
    
Since the beginning of 2012, we have been focused on improving our capital structure through a number of initiatives including working capital improvements, exiting underperforming or non-strategic businesses, and taking advantage of strategic refinancing opportunities and attractive leveraged loan and high yield debt market conditions. In connection with these activities, through the end of 2016, we continued to successfully reduce our outstanding debt and weighted average interest rate, which will result in annual cash interest savings of approximately $40 million in 2017 as compared to 2012. We have been able to accomplish this while reinvesting cash into our businesses via three acquisitions and focused capital expenditures.

Our continued operational improvements have provided us greater flexibility to address our higher interest rate debt instruments in 2016. During the first quarter of 2016, we extinguished $34.5 million of our 7% senior exchangeable notes due 2017, which we refer to as the 7% Notes, and $10.0 million of our 11.5% senior notes due 2017, which we refer to as the 11.5% Notes.

During the second quarter of 2016, we closed on an exchange offer, which we refer to as the Exchange Offer, whereby approximately 80% of our 11.5% Notes were exchanged for newly issued 6.000% senior unsecured notes due 2024, which we refer to as the 6.000% Unsecured Notes, and warrants, which we refer to as the Warrants, to purchase shares of common stock, par value $0.01 per share, of Cenveo, Inc., which we refer to as the Common Stock, representing 16.6% of our outstanding Common Stock as of June 10, 2016. Each Warrant is currently exercisable for 0.125 shares of Common Stock (as adjusted as a result of the Company’s recent reverse stock split). For each $1,000 principal amount of 11.5% Notes exchanged, the holder received $700 aggregate principal amount of 6.000% Unsecured Notes and Warrants to purchase 9.25 shares of Common Stock. Upon closing the Exchange Offer, we emerged with lower overall debt, stronger cash flow due to significantly lower future interest expense, and no significant scheduled debt maturities until August 2019.

During the third quarter of 2016, we completed the last transactions contemplated by the Support Agreement, dated as of May 10, 2016, pursuant to which Allianz Global Investors U.S. LLC, which we refer to as Allianz, agreed to, among other things, tender and sell to us all of the 7% Notes owned by Allianz, which we refer to as the 7% Note Purchases, in the aggregate principal amount of $37.5 million, which we refer to as the Allianz 7% Note Purchase, in exchange for: (a) payment in cash in an amount equal to (i) the aggregate principal amount of such 7% Notes multiplied by 0.6 plus (ii) an amount of interest on the amount payable pursuant to the immediately preceding clause (i) at an annual interest rate of 7% per annum, such interest accruing from June 10, 2016 until (and including) the closings of the purchases and computed based on a year of 360 days; (b) payment in cash of interest that shall have accrued in respect of such 7% Notes in accordance with the indenture relating to such 7% Notes but remained unpaid at the closings of the purchases; and (c) delivery to Allianz of Warrants to purchase Common Stock, representing in the aggregate 3.3% of the outstanding Common Stock as of June 10, 2016.

17




In connection with such agreement, during 2016 we repurchased an aggregate of $37.5 million of our 7% Notes for $22.5 million and issued an aggregate of 2,239,827 Warrants.

Concurrent with the above transactions, we amended our asset-based revolving credit facility, which we refer to as the ABL Facility, to, among other things, extend its term to 2021 and reduce the commitments thereunder by $50 million to $190 million, which we refer to as the ABL Amendment No. 4. The ABL Facility now matures in June 2021, with a springing maturity of May 2019 ahead of our existing 6.000% senior priority secured notes due 2019, which we refer to as the 6.000% Secured Notes, in the event that more than $10 million of the 6.000% Secured Notes remain outstanding at such time. On the same date, we entered into a secured indenture and note purchase agreement with Allianz pursuant to which we issued new secured notes in an aggregate principal amount of $50.0 million bearing interest at 4% per annum, which we refer to as the 4% Secured Notes. We applied the proceeds to reduce the outstanding principal amount under the ABL Facility. The 4% Secured Notes mature in December 2021.

Subsequent to the completion of the Exchange Offer and the Allianz 7% Note Purchase, during the fourth quarter of 2016, we repurchased $20.0 million of our 11.5% Notes and $5.7 million of our 7% Notes at par. After these transactions, approximately $20.5 million and $5.5 million aggregate principal amount of our 11.5% Notes and 7% Notes, respectively, remain outstanding. Additionally, we repurchased $7.0 million of our 8.500% junior priority secured notes due 2022, which we refer to as the 8.500% Notes, for $4.6 million.
On January 13, 2017, we filed a notice of redemption calling the $20.5 million remaining principal balance of our 11.5% Notes at par. We intend to redeem the full outstanding principal balance of our 11.5% Notes during the first quarter of 2017. With the completion of our call notice on the remaining portion of our 11.5% Notes we will have addressed all but $5.5 million of our debt maturing in 2017. We expect the remaining $5.5 million will be addressed prior to or at maturity in May of 2017 using cash flow from operations or availability under our ABL Facility.

Provide Quality Product Offerings

We conduct regular reviews of our product offerings, manufacturing processes and distribution methods to ensure that they meet the changing needs of our customers. We have recently made, and expect to continue to make, technology investments that enhance our sales organization's ability to offer our customers a tool which allows them to manage their programs from content through distribution. We believe our multi-product offerings along with the advancement of our current technology platform will allow us to penetrate deeper into our customer’s supply chains. Additionally, with the acquisition of certain assets of Asendia USA, Inc., which we refer to as Asendia, on August 7, 2015, we added letter shop, data processing, bindery and digital print offerings to our commercial printing operations, all of which are areas we believe add value to our capabilities of serving our customer’s needs in-house. Lastly, we are also investing in digital and variable technology as we have seen increased customer demand for these technologies. By expanding our product offerings, we intend to increase cross-selling opportunities to our existing customer base and mitigate the impact of any decline in a given market or product.

Strategic Asset Review

During 2015, we began actively moving forward with our plan to review and potentially divest certain non-strategic assets. As a result of this strategic review, during the first quarter of 2016, we completed the sale of our folded carton and shrink sleeve packaging businesses, along with our top-sheet lithographic print operation, which we refer to as the Packaging Business.

During 2015, we also completed two small strategic transactions, which we refer to as the 2015 Label Transactions, which helped facilitate the exit of two non-core product lines reported within our label operating segment. As a result of these transactions, we received $2.2 million in cash proceeds, primarily from selling customer lists. Additionally, in May 2016, in connection with our previously-announced plan to exit our coating operation, we sold certain proprietary rights and specific production equipment used to produce this customer’s specific products. As a result, we recognized a gain of approximately $2.0 million associated with the sale of the proprietary rights and equipment, which was recorded in other income, net during 2016. As part of this transaction, we also earned production incentives of $3.0 million during 2016 associated with incremental production and delivery targets with this customer, which were recorded in net sales. We refer to this transaction as the 2016 Label Transaction.


18



We believe there continues to be opportunities for further transactions of various magnitudes given our desire to tighten our management focus and minimize non-core product lines and monetize assets opportunistically.
Acquisitions

On August 7, 2015, we acquired certain assets of Asendia. The acquired assets provide letter shop, data processing, bindery and digital printing offerings. We also added approximately 40 employees.

Discontinued Operations

During 2015, we began actively moving forward with our plan to review and potentially divest certain non-strategic assets. As a result of this strategic review, during the first quarter of 2016, we completed the sale of our Packaging Business.

The financial results for this transaction have been accounted for as discontinued operations for all periods presented.

Reportable Segments

We operate three complementary reportable segments: envelope, print and label. Prior to the disposition of the Packaging Business, we operated four operating segments: envelope, print, label and packaging. Based upon similar economic characteristics and management reporting, prior to the disposition of the Packaging Business, we previously aggregated the label and packaging operating segments to have a total of three reportable segments: envelope, print and label and packaging.

Consolidated Operating Results

A summary of our consolidated statements of operations is presented below. The summary presents reported net sales and operating income (loss). See Segment Operations below for a summary of net sales and operating income (loss) of our reportable segments we use internally to assess our operating performance. Our reporting periods for 2016 and 2015 consisted of 52 and 53 week periods, respectively, and ended on December 31, 2016 and January 2, 2016, respectively. We refer to such periods herein as: (i) the year ended 2016; and (ii) the year ended 2015. All references to years and year-ends herein relate to fiscal years rather than calendar years.

19



 
 
For The Years Ended
 
 
2016
 
2015
 
 
(in thousands, except
per share amounts)
Net sales
 
$
1,660,001

 
$
1,741,779

Operating income (loss):
 
 

 
 
Envelope
 
$
60,684

 
$
66,424

Print
 
17,613

 
15,122

Label
 
30,549

 
39,533

Corporate
 
(32,814
)
 
(37,286
)
Total operating income
 
76,032

 
83,793

Interest expense, net
 
85,753

 
100,805

(Gain) loss on early extinguishment of debt, net
 
(82,481
)
 
1,252

Other income, net
 
(2,344
)
 
(3,196
)
Income (loss) from continuing operations before income taxes
 
75,104

 
(15,068
)
Income tax expense
 
4,258

 
4,393

Income (loss) from continuing operations
 
70,846

 
(19,461
)
Loss from discontinued operations, net of taxes
 
(2,897
)
 
(11,390
)
Net income (loss)
 
$
67,949

 
$
(30,851
)
Income (loss) per share – basic:
 
 

 
 
Continuing operations
 
$
8.31

 
$
(2.30
)
Discontinued operations
 
(0.34
)
 
(1.34
)
Net income (loss)
 
$
7.97

 
$
(3.64
)
 
 
 
 
 
Income (loss) per share – diluted:
 
 

 
 

Continuing operations
 
$
7.63

 
$
(2.30
)
Discontinued operations
 
(0.31
)
 
(1.34
)
Net income (loss)
 
$
7.32

 
$
(3.64
)

20


Net Sales
 
Net sales decreased $81.8 million, or 4.7%, for the year ended 2016, as compared to the year ended 2015, primarily due to lower sales from our envelope segment of $43.6 million, lower sales from our label segment of $20.7 million, and lower sales from our print segment of $17.5 million.

See Segment Operations below for a detailed discussion of the primary factors affecting the change in our net sales by reportable segment.

Operating Income

Operating income decreased $7.8 million, or 9.3%, for the year ended 2016, as compared to the year ended 2015. This decrease was due to: (i) a decrease in operating income from our label segment of $9.0 million; and (ii) a decrease in operating income from our envelope segment of $5.7 million; partially offset by (i) lower corporate expenses of $4.5 million; and (ii) an increase in operating income from our print segment of $2.5 million.

See Segment Operations below for a more detailed discussion of the primary factors for the changes in operating income by reportable segment.

Interest Expense

Interest expense decreased $15.1 million to $85.8 million for the year ended 2016, as compared to $100.8 million for the year ended 2015. The decrease was primarily due to a lower weighted average interest rate for 2016, primarily due to the Exchange Offer; the partial retirement of our 11.5% Notes during 2016 and 2015 and the partial retirement of our 7% Notes during 2016. Interest expense for the year ended 2016 reflected average outstanding debt of approximately $1.1 billion and a weighted average interest rate of 6.8%, compared to average outstanding debt of approximately $1.2 billion and a weighted average interest rate of 7.2% for the year ended 2015.

(Gain) Loss on Early Extinguishment of Debt    
2016 Extinguishments

For the year ended 2016, we recorded a total gain on early extinguishment of debt of $82.5 million, comprised of the following transactions:

Subsequent to the completion of the Exchange Offer and the Allianz 7% Note Purchase, we recorded a gain on early extinguishment of debt of $2.3 million related to the repurchase of $7.0 million of our 8.500% Notes, of which $2.5 million related to a discount on the purchase price, partially offset by a write-off of unamortized debt issuance costs of $0.1 million and a write-off of original issuance discount of $0.1 million. We also recorded a loss on early extinguishment of debt of $0.1 million related to the repurchase of $20.0 million of our 11.5% Notes, all of which related to the write-off of unamortized debt issuance costs and original issuance discount. Additionally, we recorded a loss on early extinguishment of debt of less than $0.1 million related to the repurchase of $5.7 million of our 7% Notes, all of which related to the write-off of unamortized debt issuance costs.

In connection with the Allianz 7% Note Purchase, we recorded a gain on early extinguishment of debt of $12.8 million related to the repurchase of $37.5 million of our 7% Notes, of which $15.0 million related to a discount on the purchase price, partially offset by the fair value of the Warrants issued of $1.3 million, $0.6 million of transaction fees and expenses and a write-off of unamortized debt issuance costs of $0.3 million.

In connection with the Exchange Offer, we recorded a gain on early extinguishment of debt of $46.1 million, of which $49.6 million related to a discount on the difference of the net carrying value of the extinguished 11.5% Notes and the fair value of the new 6.000% Unsecured Notes, partially offset by a write-off of unamortized debt issuance costs of $0.8 million, a write-off of original issuance discount of $1.2 million, and $1.5 million of transaction fees and expenses.    

In connection with ABL Amendment No. 4, we recorded a loss on early extinguishment of debt of $0.2 million related to the write off of unamortized debt issuance costs.

Prior to the Exchange Offer, we recorded a gain on early extinguishment of debt of $16.5 million related to the repurchase of $34.5 million of our 7% Notes, of which $16.8 million related to a discount on the purchase price, partially offset by a write-off of unamortized debt issuance costs of $0.3 million. Additionally, we recorded a gain on early extinguishment of debt of $5.1

21


million related to the repurchase of $10.0 million of our 11.5% Notes, of which $5.3 million related to a discount on the purchase, partially offset by a write-off of unamortized debt issuance costs of $0.1 million and a write-off of original issuance discount of $0.1 million.

2015 Extinguishments

For the year ended 2015, we recorded a total loss on early extinguishment of debt of $1.3 million. We paid in full an existing equipment loan, which had a remaining principal balance at the time of $12.3 million. In connection with this extinguishment, we recorded a loss on early extinguishment of debt of $0.7 million, of which $0.5 million related to the write-off of unamortized debt issuance costs and $0.2 million related to prepayment fees. Additionally, we recorded a loss on early extinguishment of debt of $0.6 million related to the repurchase of $22.6 million of our 11.5% Notes, of which $0.2 million related to the write-off of unamortized debt issuance costs, $0.2 million related to the write-off of original issuance discount, and $0.2 million related to a premium paid over the principal amount upon repurchase.

Other Income, Net

For the year ended 2016, we recognized other income, net, of $2.3 million, primarily comprised of a gain of approximately $2.1 million recognized in connection with a sale of a manufacturing facility within our envelope segment and a gain of approximately $2.0 million in connection with the 2016 Label Transaction, partially offset by other non-operating expenses.

For the year ended 2015, we recognized other income, net, of $3.2 million. This is primarily comprised of a gain on sale of a manufacturing facility within our print segment of $3.1 million and a gain of $2.2 million related to the 2015 Label Transactions, partially offset by other non-operating expenses and losses related to foreign currency exchange.

Income Taxes
 
 
For The Years Ended
 
 
2016
 
2015
 
 
 
Income tax expense from U.S. operations
 
$
3,307

 
$
3,533

Income tax expense from foreign operations
 
951

 
860

Income tax expense
 
$
4,258

 
$
4,393

Effective income tax rate
 
5.7
%
 
(29.2
)%


Income Tax Expense

In 2016, we had an income tax expense of $4.3 million and our effective tax rate during 2016 differed from the federal statutory rate primarily as a result of having a full valuation allowance related to our net deferred tax assets in the United States.
In 2015, we had an income tax expense of $4.4 million and our effective tax rate during 2015 differed from the federal statutory rate primarily as a result of having a full valuation allowance related to our net deferred tax assets in the United States.
We do not believe our unrecognized tax benefits will change significantly during the next twelve months. As of the year ended 2016, our federal tax loss carryforward was $220.0 million after utilization of $112.5 million during 2016, primarily due to gains on early extinguishment of debt and the sale of our Packaging Business.

Valuation Allowance
We review the likelihood that we will realize the benefit of our deferred tax assets and therefore the need for valuation allowances on a quarterly basis, or more frequently if events indicate that a review is required. In determining the requirement for a valuation allowance, the historical and projected financial results of the legal entity or consolidated group recording the net deferred tax asset is considered, along with all other available positive and negative evidence. The factors considered in our determination of the probability of the realization of the deferred tax assets include, but are not limited to: recent historical financial results, historical taxable income, projected future taxable income, the expected timing of the reversals of existing temporary differences, the duration of statutory carryforward periods and tax planning strategies. If, based upon the weight of available evidence, it is more likely than not the deferred tax assets will not be realized, a valuation allowance is recorded.

22


Concluding that a valuation allowance is not required is difficult when there is significant negative evidence which is objective and verifiable, such as cumulative losses in recent years. We utilize a rolling twelve quarters of pre-tax income or loss adjusted for significant permanent book to tax differences, as well as non-recurring items, as a measure of our cumulative results in recent years. In the United States, our analysis indicates that we have cumulative three year historical losses on this basis. While there are significant impairment, restructuring and refinancing charges driving our cumulative three year loss, this is considered significant negative evidence which is objective and verifiable and therefore, difficult to overcome. However, the three year loss position is not solely determinative and accordingly, we consider all other available positive and negative evidence in our analysis. Based upon our analysis, which incorporated the excess capacity and pricing pressure we have experienced in certain of our product lines, we believe it is more likely than not that the net deferred tax assets in the United States will not be fully realized in the future. Accordingly, we have a valuation allowance related to those net deferred tax assets of $117.8 million as of the year ended 2016. Deferred tax assets related to certain net operating losses also did not reach the more likely than not realizability criteria and accordingly, were subject to a valuation allowance, the balance of which, as of the year ended 2016, was $11.4 million. Our valuation allowance declined $34.0 million from January 2, 2016, primarily due to the $112.5 million federal tax loss carryforward utilization in 2016 which was driven primarily from the gain on early extinguishment of debt and the sale of our Packaging Business. We will continue to closely monitor our position with respect to the full realization of our net deferred tax assets and the corresponding valuation allowances on those assets and make adjustments as needed in the future as our facts and circumstances dictate.
There is no corresponding income tax benefit recognized with respect to losses incurred and no corresponding income tax expense recognized with respect to earnings generated in jurisdictions with a valuation allowance. This causes variability in our effective tax rate. We intend to maintain the valuation allowances until it is more likely than not that the net deferred tax assets will be realized. If operating results improve on a sustained basis, or if certain tax planning strategies are implemented, our conclusions regarding the need for valuation allowances could change, resulting in the reversal of the valuation allowances in the future, which could have a significant impact on income tax expense in the period recognized and subsequent periods.
Loss from Discontinued Operations, net of taxes
    
For the years ended 2016 and 2015, we had a loss from discontinued operations, net of taxes, of $2.9 million and $11.4 million, respectively. On January 19, 2016, we completed the sale of our Packaging Business. We received total cash proceeds of approximately $89.6 million, net of transaction costs of approximately $6.3 million. This resulted in the recognition of a total loss of $3.6 million, of which a gain of $1.4 million was recorded during the year ended 2016. For the year ended 2015, we recorded a non-cash loss on sale of discontinued operations of $5.0 million and a non-cash goodwill impairment charge of $9.9 million related to this transaction. This loss was based on the executed purchase agreement and the net assets of the Packaging Business. In accordance with the guidance in ASC 205-20 Presentation of Financial Statements - Discontinued Operations and ASC 360 Property, Plant & Equipment, the operating results of our Packaging Business, as well as the non-cash loss on sale of discontinued operations, are reported in discontinued operations in our consolidated financial statements for all periods presented herein.

For the years ended 2016 and 2015, we had a loss from the operations of our discontinued operations of $3.0 million and $7.8 million, respectively, primarily from our Packaging Business. Additionally, we recorded tax expense for our discontinued operations of $1.3 million for the year ended 2016 as compared to a tax benefit of $1.4 million for the year end 2015.

Segment Operations
 
Our Chief Executive Officer monitors the performance of the ongoing operations of our three reportable segments. We assess performance based on net sales and operating income.

Envelope
 
 
For The Years Ended
 
 
2016
 
2015
 
 
 
Segment net sales
 
$
865,160

 
$
908,718

Segment operating income
 
$
60,684

 
$
66,424

Operating income margin
 
7.0
%
 
7.3
%
Restructuring and other charges
 
$
2,618

 
$
3,500



23


Segment Net Sales
 
Segment net sales for our envelope segment decreased $43.6 million, or 4.8%, for the year ended 2016, as compared to the year ended 2015. Net sales for our envelope operations decreased primarily due to: (i) lower sales volumes in our office products business line, primarily due to the accelerated rationalization of customer distribution centers and retail store fronts resulting in lower demand; (ii) lower sales volumes from our wholesale business line due to inventory rationalization programs; (iii) continued lower demand for our generic transactional envelope products; and (iv) incremental sales reductions resulting from a 52 week fiscal year in 2016, as compared to a 53 week fiscal year in 2015. These decreases were partially offset by increased sales volumes within our direct mail platform, primarily driven by financial institutions.

Segment Operating Income

Segment operating income for our envelope segment decreased $5.7 million, or 8.6%, for the year ended 2016, as compared to the year ended 2015. This decrease was primarily due to lower gross margin of $8.9 million due to: (i) lower sales volumes from office products, wholesale and generic transactional products partially offset by higher sales volumes from direct mail products; and (ii) incremental sales reductions resulting from a 52 week fiscal year in 2016, as compared to a 53 week fiscal year in 2015. These decreases were partially offset by: (i) lower selling, general and administrative expenses of $2.2 million primarily due to cost reduction initiatives and lower sales volumes; and (ii) lower restructuring and other charges of $0.9 million, primarily related to charges associated with the integration of certain assets of National with our operations in 2015 as compared to cost reduction initiatives initiated during 2016.

Print
 
 
For The Years Ended
 
 
2016
 
2015
 
 
 
Segment net sales
 
$
493,464

 
$
510,974

Segment operating income
 
$
17,613

 
$
15,122

Operating income margin
 
3.6
%
 
3.0
%
Restructuring and other charges
 
$
2,028

 
$
6,853


Segment Net Sales
 
Segment net sales for our print segment decreased $17.5 million, or 3.4%, for the year ended 2016, as compared to the year ended 2015. The decline was primarily due to: (i) decreased sales volumes in our publisher services group due to lower customer demand; (ii) continued pricing pressures associated with print related products; and (iii) incremental sales reductions resulting from a 52 week fiscal year in 2016, as compared to a 53 week fiscal year in 2015. These decreases were partially offset by increased sales volume with certain customers within our commercial print group, primarily financial institutions; and (ii) net sales generated from Asendia, as Asendia was only included in our 2015 results beginning on August 7, 2015, the date of acquisition.

Segment Operating Income

Segment operating income for our print segment increased $2.5 million, or 16.5%, in 2016, as compared to 2015. This increase was primarily due to: (i) lower restructuring and other charges of $4.8 million primarily due to a closure of a print facility during the first quarter of 2015 as compared to cost reduction initiatives initiated during 2016; and (ii) lower selling, general and administrative expenses of $1.5 million due to lower sales volumes. These items were partially offset by lower gross margin of $4.0 million primarily due to: (i) lower customer demand; and (ii) incremental sales reductions resulting from a 52 week fiscal year in 2016, as compared to a 53 week fiscal year in 2015.


24


Label
 
 
For The Years Ended
 
 
2016
 
2015
 
 
(in thousands)
Segment net sales
 
$
301,377

 
$
322,087

Segment operating income
 
$
30,549

 
$
39,533

Operating income margin
 
10.1
%
 
12.3
%
Restructuring and other charges
 
$
4,771

 
$
486


Segment Net Sales

Segment net sales for our label segment decreased $20.7 million, or 6.4%, for the year ended 2016, as compared to the year ended 2015. This decrease is primarily due to: (i) lower sales of $12.4 million related to the exit of our coating operation; (ii) volume declines within certain of our existing long run label customers; and (iii) incremental sales reductions resulting from a 52 week fiscal year in 2016, as compared to a 53 week fiscal year in 2015. These declines were partially offset by one-time production incentives of $3.0 million related to the exit of our coating operation.

Segment Operating Income

Segment operating income for our label segment decreased $9.0 million, or 22.7%, for the year ended 2016, as compared to the year ended 2015 primarily due to (i) higher restructuring and other charges of $4.3 million related to our plans to exit our coating operation and the write down of an investment; (ii) higher selling, general and administrative expenses of $1.6 million, primarily due to higher information technology depreciation expense related to our e-commerce initiatives and increased advertising campaigns; and (iii) lower gross margins due to the exit of our coating operation and lower sales volumes primarily resulting from a 52 week fiscal year in 2016, as compared to a 53 week fiscal year in 2015. These decreases were partially offset by: (i) production incentives of $3.0 million related to the exit of our coating operation; and (ii) decreased amortization expense of $1.8 million due to the final amortization of an intangible asset during 2016.

Corporate Expenses

Corporate expenses decreased by $4.5 million, or 12.0%, for the year ended 2016, as compared to the year ended 2015, primarily due to: (i) lower selling, general and administrative expenses due to cost reduction initiatives and lower incentive compensation; and (ii) $1.7 million of income generated from our transition services agreement in connection with the sale of our Packaging Business. The decreases in corporate expenses were partially offset by increased restructuring and other charges due to cost actions implemented during 2016.

Restructuring and Other Charges

Restructuring

We currently have three active cost savings, restructuring and integration plans, which are related to the implementation of cost savings initiatives focused on overhead cost eliminations, including headcount reductions and the potential closure of certain manufacturing facilities. We refer to these plans as the 2017 Plan, the 2016 Plan and the 2015 Plan. Each plan is primarily associated with a specific fiscal year of the planned cost actions.

During 2016, we implemented the 2017 Plan and the 2016 Plan and substantially completed the 2015 Plan. At this time, we are still contemplating additional cost actions that would be associated with the 2017 Plan. During 2015, we also completed our plan to integrate certain assets of National, which we refer to as the National Plan, by completing the closure and consolidation of nine manufacturing facilities into our existing envelope operations and the opening of two new facilities.

We also currently have certain residual cost savings, restructuring and integration plans, which we refer to as the Residual Plans. As a result of these cost savings actions, over the last several years we have closed or consolidated a significant amount of manufacturing facilities and have had a significant number of headcount reductions. We do not anticipate any significant future expenses related to the Residual Plans, other than modifications to current assumptions for lease terminations and multi-employer pension withdrawal liabilities and ongoing expenses related to maintaining restructured assets.


25


During 2016, as a result of our restructuring and integration activities, we incurred $12.0 million of restructuring and other charges, which included $5.1 million of employee separation costs, $3.2 million of net non-cash charges on long-lived assets, equipment moving expenses of $0.4 million, lease termination expenses of $0.4 million, multi-employer pension withdrawal expenses of $0.8 million and building clean-up and other expenses of $2.0 million.

During 2015, as a result of our restructuring and integration activities, we incurred $12.6 million of restructuring and other charges, which included $2.6 million of employee separation costs, $2.1 million of net non-cash charges on long-lived assets, equipment moving expenses of $0.2 million, lease termination expenses of $0.5 million, multi-employer pension withdrawal expenses of $5.0 million and building clean-up and other expenses of $2.2 million.

As of the year ended 2016, our total restructuring liability was $20.9 million, of which $5.5 million is included in other current liabilities, and $15.4 million is included in other liabilities. Our multi-employer pension withdrawal liabilities, presented on a discounted basis, are $17.5 million of our remaining restructuring liability. We believe these liabilities represent our anticipated ultimate withdrawal liabilities; however, we are exposed to significant risks and uncertainties arising from our participation in these multi-employer pension plans. It is not possible to quantify the potential impact of our future actions or the future actions of other participating employers from the multi-employer pension plans for which we have exited. Our anticipated ultimate withdrawal liabilities may be significantly impacted in the future due to lower future contributions or increased withdrawals from other participating employers.
 
Goodwill and Intangible Asset Impairments

There were no goodwill impairments recorded for the years ended 2016 or 2015, except as disclosed in Note 3 to our consolidated financial statements, which relates to discontinued operations.

There were no intangible asset impairments for the years ended 2016 or 2015.

Liquidity and Capital Resources

Net Cash Provided By Operating Activities of Continuing Operations: Net cash provided by operating activities of continuing operations was $49.4 million for the year ended 2016, which was primarily due to: (i) a source of cash from accounts receivables due to the timing of collections from and sales to our customers; (ii) lower inventories as a result of our inventory management programs; and (iii) our net income of $67.9 million adjusted for non-cash items of $17.1 million, primarily our gain on early extinguishment of debt of $82.5 million offset by depreciation and amortization expense of $47.2 million. These inflows were partially offset by a use of cash of $36.3 million from: (i) accounts payable primarily resulting from the timing of vendor payments due to lower volumes and discounted term opportunities; and (ii) other working capital changes, primarily resulting from the timing of customer related liabilities and lower freight activity due to lower volumes.

Net cash provided by operating activities of continuing operations was $16.2 million for the year ended 2015, which was primarily due to our net loss of $30.9 million adjusted for non-cash items of $82.3 million which was partially offset by: (i) a use of cash of $22.3 million from working capital; and (ii) pension and other postretirement plan contributions of $6.7 million. The use of cash from working capital primarily resulted from: (i) a use of cash from inventory due to the timing of orders from our customers; (ii) the timing of payments to our vendors; and (iii) a use of cash from accounts receivables due to the timing of collections from and sales to our customers.

Cash provided by operating activities is generally sufficient to meet daily disbursement needs. On days when our cash receipts exceed disbursements, we reduce our credit facility balance or place excess funds in conservative, short-term investments until there is an opportunity to pay down debt. On days when our cash disbursements exceed cash receipts, we use invested cash balances and/or our credit facility to fund the difference. As a result, our daily credit facility balance fluctuates depending on working capital needs. Regardless, at all times we believe we have sufficient liquidity available to us to fund our cash needs.

Net Cash (Used In) Provided By Operating Activities of Discontinued Operations: Represents the net cash (used in) provided by operating activities of our discontinued operations.
Net Cash Used In Investing Activities of Continuing Operations: Net cash used in investing activities of continuing operations was $30.8 million for the year ended 2016, primarily resulting from capital expenditures of $41.1 million, partially offset by proceeds received from the sale of property, plant and equipment of $8.3 million and proceeds from the 2016 Label Transaction of $2.0 million.


26


Net cash used in investing activities of continuing operations was $17.2 million for the year ended 2015, primarily resulting from capital expenditures of $25.9 million and $2.0 million of cash used in the acquisition of Asendia. These uses of cash were partially offset by proceeds received from the sale of property, plant and equipment of $8.6 million and proceeds from the 2015 Label Transactions of $2.2 million.

We estimate that we will spend approximately $20.0 to $25.0 million on capital expenditures in 2017, after considering proceeds from the sale of property, plant and equipment. Our primary sources for our capital expenditures are cash generated from operations, proceeds from the sale of property, plant and equipment, and financing capacity within our current debt arrangements. These sources of funding are consistent with prior years’ funding of our capital expenditures.

Net Cash Provided By (Used In) Investing Activities of Discontinued Operations: Represents the net cash used in our discontinued operations related to investing activities. For the year ended 2016, the cash provided by discontinued investing activities of $95.9 million is comprised of gross cash proceeds received related to the sale of our Packaging Business.

For the year ended 2015, the cash used in investing activities of discontinued operations of $2.3 million resulted from capital expenditures for the Packaging Business.

Net Cash Used In Financing Activities of Continuing Operations: Net cash used in financing activities of continuing operations was $109.2 million for the year ended 2016, primarily due to: (i) net repayments of $66.5 million under our ABL Facility; (ii) cash paid of $45.9 million related to the extinguishment of $77.8 million of our 7% Notes; (iii) cash paid of $24.7 million related to the extinguishment of $30.0 million of our 11.5% Notes; (iv) financing-related costs and expenses of $11.6 million, primarily related to the Exchange Offer; (v) various repayments on other long-term debt totaling $5.6 million; and (vi) cash paid of $4.6 million related to the extinguishment of $7.0 million of our 8.500% Notes. This cash usage was partially offset by proceeds of $50.0 million from the 4% Secured Notes.

Net cash used in financing activities of continuing operations was $15.1 million for the year ended 2015, primarily due to: (i) the extinguishment of $22.6 million of our 11.5% Notes; and (ii) net repayment of other long-term debt of $4.0 million, partially offset by net borrowings of $13.5 million under our ABL Facility.

Net Cash Used In Financing Activities of Discontinued Operations: Represents the net cash used in our discontinued operations related to the repayment of other long-term debt.

Contractual Obligations and Other Commitments: The following table details our significant contractual obligations and other commitments on an undiscounted basis as of the year ended (in thousands):
 
 
 
 
 
 
 
 
 
 
Payments Due
 
  Long-Term Debt(1)
 
Operating
Leases
 
Other (2)
 
Total
2017
 
$
96,930

 
$
21,929

 
$
23,255

 
$
142,114

2018
 
67,957

 
19,391

 
7,615

 
94,963

2019
 
591,211

 
14,937

 
6,010

 
612,158

2020
 
31,759

 
11,870

 
5,539

 
49,168

2021
 
161,949

 
7,306

 
5,191

 
174,446

Thereafter                                       
 
373,142

 
15,392

 
41,954

 
430,488

Total                                       
 
$
1,322,948

 
$
90,825

 
$
89,564

 
$
1,503,337

 ________________________
(1) 
Includes $269.0 million of estimated interest expense over the term of our long-term debt, with variable rate debt having an average interest rate of approximately 3.4%.
(2) 
Includes projected 2017 pension contributions of $7.1 million, anticipated benefit payments related to other postretirement benefit plans of $17.1 million, anticipated workers' compensation paid losses of $11.2 million, energy commitments of $5.8 million, restructuring-related liabilities of $48.3 million, including interest expense on lease terminations and multi-employer pension withdrawal liabilities. Excluded from the table are $5.5 million of income tax contingencies as we are unable to reasonably estimate the ultimate amount payable or timing of settlement.



27


Long-Term Debt: Our total outstanding long-term debt, including current maturities, was approximately $1.0 billion as of the year ended 2016, a decrease of $190.0 million from the year ended 2015. The decrease was primarily due to: (i) the Exchange Offer, which resulted in a decrease of $62.6 million in debt, net of capitalized debt issuance costs and original issuance discount; (ii) net repayments of $66.5 million under our ABL Facility; (iii) the extinguishment of $77.8 million of our 7% Notes; and (iv) extinguishment of $30.0 million of our 11.5% Notes, all of which is partially offset by the issuance of our 4% Secured Notes. As of the year ended 2016, approximately 92% of our debt outstanding was subject to fixed interest rates. As of February 21, 2017, we had approximately $80.4 million of borrowing availability under our ABL Facility.

From time to time, we may seek to refinance our debt obligations, or purchase our outstanding notes in open market purchases, privately negotiated transactions or other means. Such transactions, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors.

Debt Compliance

As of the year ended 2016, we believe we were in compliance with all debt agreement covenants. We anticipate being in compliance with all debt agreements throughout the 2017 fiscal year.

Letters of Credit
 
As of the year ended 2016, we had outstanding letters of credit of approximately $17.7 million related to performance and payment guarantees. Based on our experience with these arrangements, we do not believe any obligations which may arise will be significant.

Credit Ratings

Our current credit ratings are as follows:
Rating Agency
 
Corporate
Rating
 
6.000% Secured Notes
 
8.500% Notes
 
11.5%
Notes
 
6.000% Unsecured Notes
 
Outlook
 
Last Update
Moody’s
 
Caa1
 
B3
 
Caa2
 
Caa3
 
NR
 
Stable
 
June 2016
Standard & Poor’s
 
CCC+
 
B-
 
CCC
 
NR
 
CCC-
 
Negative
 
July 2016
In June 2016, Moody's Investors Services, which we refer to as Moody's, upgraded our Corporate Rating and the ratings on our 6.000% Secured Notes and 8.500% Notes. Additionally, Moody's affirmed the ratings on our 11.5% Notes. In July 2016, Standard & Poor's Ratings Services, which we refer to as Standard & Poor's, upgraded our Corporate Rating, rated our 6.000% Unsecured Notes for the first time and withdrew the ratings on our 11.5% Notes. Additionally, the rating on our 6.000% Secured Notes and 8.5000% Notes remained unchanged. The detail of all current ratings has been provided in the table above.
The terms of our existing debt do not have any rating triggers that impact our funding availability or influence our daily operations, including planned capital expenditures. We do not believe that our current ratings will unduly influence our ability to raise additional capital if and/or when needed. Some of our constituents closely track rating agency actions and would note any raising or lowering of our credit ratings; however, we believe that along with reviewing our credit ratings, additional quantitative and qualitative analysis must be performed to accurately judge our financial condition.
    
We expect our internally generated cash flows and financing available under our ABL Facility will be sufficient to fund our working capital needs for the next twelve months; however, this cannot be assured.
Off-Balance Sheet Arrangements: We had no off-balance sheet arrangements as of the year ended 2016 other than those disclosed on the Contractual Obligations and Other Commitments table.
Critical Accounting Matters
We prepare our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. This requires us to make estimates and assumptions which affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, as well as the reported amount of revenues and expenses during the reporting period. We evaluate these estimates and assumptions on an ongoing basis based on historical experience, and various other factors which we believe are reasonable under the circumstances. Actual results could differ from estimates.

28


We believe the following represent our more critical estimates and assumptions used in the preparation of our consolidated financial statements:
Allowance for Losses on Accounts Receivable: We maintain a valuation allowance based on the expected collectability of our accounts receivable, which requires a considerable amount of judgment in assessing the current credit worthiness of customers and related aging of past due balances. As of the years ended 2016 and 2015, the allowance provided for potentially uncollectible accounts receivable was $2.1 million and $5.9 million, respectively. Charges for bad debts recorded to the statement of operations for the years ended 2016 and 2015 were $1.4 million and $2.6 million, respectively. We cannot guarantee that our current credit losses will be consistent with those in the past. These estimates may prove to be inaccurate, in which case we may have overstated or understated the allowance for losses required for uncollectible accounts receivable.
Inventory Valuation: Inventories are stated at the lower of cost or market, with cost determined on a first-in, first-out or average cost basis. Cost includes materials, labor and overhead related to the purchase and production of inventories. When there is a significant decrease in demand for our products and market price is below cost, we are required to reduce our inventory balances accordingly.
Provision for Impairment of Long-Lived Assets: We evaluate long-lived assets, including property, plant and equipment and intangible assets other than goodwill and indefinite lived intangible assets, for impairment whenever events or changes in circumstances indicate the carrying amounts of specific assets or group of assets may not be recoverable. When an evaluation is required, we estimate the future undiscounted cash flows associated with the specific asset or group of assets. If the cost of the asset or group of assets cannot be recovered by these undiscounted cash flows, we would assess the fair value of the asset or asset group and if necessary, an impairment charge would be recorded. Our estimates of future cash flows are based on our experience and internal business plans. Our internal business plans require judgments regarding future economic conditions, product demand and pricing. Although we believe our estimates are appropriate, significant differences in the actual performance of an asset or group of assets may materially affect our evaluation of the recoverability of the asset values currently recorded. Additional impairment charges may be necessary in future years.
Provision for Impairment of Goodwill and Indefinite Lived Intangible Assets: We evaluate the carrying value of our goodwill and indefinite lived intangible assets annually at the end of November and whenever events or circumstances make it more likely than not an impairment may have occurred. Financial Accounting Standards Board, which we refer to as the FASB, Accounting Standards Codification 350, Goodwill and Other Intangible Assets, which we refer to as ASC 350, provides us with the option of performing a qualitative assessment, if elected, prior to calculating the fair value of an indefinite lived intangible asset or the fair value of a reporting unit for goodwill under a quantitative approach. If we determine, based on qualitative factors, the fair value of an indefinite lived intangible asset or the fair value of a reporting unit is more likely than not to be less than the respective carrying value, a quantitative impairment test would be required to be performed. Otherwise, further impairment testing would not be needed.
ASC 350 prescribes a two-step quantitative method for determining goodwill impairment. In the first step, we compare the estimated fair value of each reporting unit to its carrying amount, including goodwill. If the carrying amount of a reporting unit exceeds the estimated fair value, step two is completed to determine the amount of the impairment loss. Step two requires the allocation of the estimated fair value of the reporting unit to the assets, including any unrecognized intangible assets, and liabilities in a hypothetical purchase price allocation. Any remaining unallocated fair value represents the implied fair value of goodwill, which is compared to the corresponding carrying value of goodwill to compute the goodwill impairment amount.
As part of our quantitative impairment analysis for each reporting unit, we estimate the fair value of each reporting unit, primarily using the income approach. The income approach requires management to estimate a number of factors for each reporting unit, including projected future operating results, economic projections, anticipated future cash flows, discount rates, and the allocation of shared service or corporate items. The market approach was used as a test of reasonableness of the conclusions reached in the income approach. The market approach estimates fair value using comparable marketplace fair value data from within a comparable industry grouping.
The determination of the fair value of the reporting units and the allocation of that value to individual assets and liabilities within those reporting units requires management to make significant estimates and assumptions. These estimates and assumptions primarily include, but are not limited to: the selection of appropriate peer group companies; control premiums appropriate for acquisitions in the industries in which we compete; the discount rate; terminal growth rates; and forecasts of net sales, operating income, depreciation and amortization and capital expenditures. The allocation requires several analyses to determine the fair value of assets and liabilities including, among others, trade names, customer relationships, and property, plant and equipment. Although we believe our estimates of fair value are reasonable, actual financial results could differ from those estimates due to the inherent uncertainty involved in making such estimates. Changes in assumptions concerning future financial results or other underlying assumptions could have a significant impact on either the fair value of the reporting units, the amount of the goodwill

29


impairment charge, or both. We also compared the sum of the estimated fair values of the reporting units to our total enterprise value as implied by the market value of our equity securities. This comparison indicated that, in total, our assumptions and estimates were reasonable. However, future declines in the overall market value of our equity securities may indicate the fair value of one or more reporting units has declined below their carrying value. Such declines are reviewed in the context of the overall stock market, the business climate within the industries in which we operate and other relevant facts and circumstances.
In 2016 and 2015, we elected to bypass the qualitative only assessment and we performed quantitative assessments on goodwill. We did not record any goodwill impairment charges for the years ended 2016 or 2015, except as disclosed in Note 3 to our consolidated financial statements.
One measure of the sensitivity of the amount of goodwill impairment charges to key assumptions is the amount by which each reporting unit had fair value in excess of its carrying amount or had carrying amount in excess of fair value for the first step of the goodwill impairment test. In 2016, the envelope, print and label reporting units had fair value in excess of carrying value, with fair value exceeding carrying value by at least 30% for each reporting unit. Generally, changes in estimates of expected future cash flows would have a similar effect on the estimated fair value of the reporting unit. That is, a 1% change in estimated future cash flows would change the estimated fair value of the reporting unit by approximately 1%. Of the other key assumptions that impact the estimated fair values, most reporting units have the greatest sensitivity to changes in the estimated discount rate. In 2016, the discount rate for our reporting units was between 10% and 11.5%. A 100 basis point increase in our estimated discount rates would not have resulted in any reporting units failing step one.
Determining whether an impairment of indefinite lived intangible assets has occurred requires an analysis of the fair value of each of the related trade names. However, if our estimates of the valuations of our trade names prove to be inaccurate, an impairment charge could be necessary in future periods.
Our quantitative impairment analysis for trade names utilizes a relief-from-royalty method in which the hypothetical benefits of owning each respective trade name are valued by discounting hypothetical royalty revenue over projected revenues covered by the trade names. We utilized royalty rates of 1.5% to 2.0% for the use of the subject trade names based on comparable market rates, the profitability of the product employing the trade name, and qualitative factors, such as the strength of the name and years in usage. The discount rate utilized was between 11.5% and 13.0%, which was based on the weighted average cost of capital for the respective business plus a premium to account for the relative risks of the subject trade name.

In order to evaluate the sensitivity of the fair value calculations for all of our indefinite lived trade names, we applied a hypothetical 10% decrease to the estimated fair value of our trade names. The hypothetical decrease in fair value could be due to changes in discount rates and/or assumed royalty rates. The hypothetical 10% decrease in estimated fair value would not have resulted in any impairment of any of our identifiable indefinite lived trade names.

There were no intangible asset impairments for the years ended 2016 or 2015.
Self-Insurance Reserves: We are self-insured for the majority of our workers’ compensation and health insurance costs, subject to specific retention levels. We rely on claims experience and the advice of consulting actuaries and administrators in determining an adequate liability for self-insurance claims. While we believe these estimates of our self-insurance liabilities are reasonable, significant differences in our experience or a significant change in any of our assumptions could materially affect the amount of workers’ compensation and healthcare expenses we record on an annual basis.
Our self-insurance workers’ compensation liability is estimated based on reserves for claims which are established by a third-party administrator. The estimate of these reserves is adjusted from time to time to reflect the estimated future development of the claims. Our liability for workers’ compensation claims is the estimated total cost of the claims on a fully-developed and discounted basis which considers anticipated payment patterns. As of the years ended 2016 and 2015, the undiscounted liability was $12.1 million and $12.3 million, respectively, and the discounted liability was $11.2 million and $11.4 million, respectively, using discount rates of 2% for each of the years ended 2016 and 2015.
Our self-insured healthcare liability represents our estimate of claims which have been incurred, but not reported as of the years ended 2016 and 2015. We rely on claims experience and the advice of consulting actuaries to determine an adequate liability for self-insured plans. This liability was $3.2 million for both the years ended 2016 and 2015, and was estimated based on an analysis of actuarial completion factors that estimated incurred but unreported liabilities derived from the historical claims experience. The estimate of our liability for employee healthcare represents between 45 and 60 days of unreported claims.
Revenue Recognition: We recognize revenue when persuasive evidence of an arrangement exists, product delivery has occurred, pricing is fixed or determinable, and collection is reasonably assured, net of rebates earned by customers. Since a significant portion of our products are customer specific, it is common for customers to inspect the quality of the product at our facility prior to its shipment. Products shipped are not subject to contractual right of return provisions. The Company records sales

30


net of applicable sales tax. The costs of delivering finished goods to customers are recorded as freight costs and included in cost of sales. Freight costs that are either billed separately to the customer or included in the price of the product are included in net sales.
Accounting for Income Taxes: We are required to estimate our income taxes in each jurisdiction in which we operate, which primarily includes the United States and India. This process involves estimating our actual current tax expense, together with assessing temporary differences resulting from differing treatment of items for tax and financial reporting purposes. The tax effects of these temporary differences are recorded as deferred tax assets or deferred tax liabilities. Deferred tax assets generally represent items that can be used as a tax deduction or credit in our tax return in future years for which we have already recorded an expense in our consolidated financial statements. Deferred tax liabilities generally represent tax items that have been deducted for tax purposes, but have not yet been recorded as an expense in our consolidated financial statements. As of the years ended 2016 and 2015, we had net deferred tax liabilities of $40.4 million and $38.8 million, respectively, from our United States operations. As of the years ended 2016 and 2015, we had net deferred tax assets of $1.1 million and $0.9 million, respectively, from our foreign operations.
We review the likelihood that we will realize the benefit of our deferred tax assets and therefore the need for valuation allowances on a quarterly basis, or more frequently if events indicate that a review is required. In determining the requirement for a valuation allowance, the historical and projected financial results of the legal entity or consolidated group recording the net deferred tax asset is considered, along with all other available positive and negative evidence. The factors considered in our determination of the probability of the realization of the deferred tax assets include, but are not limited to: recent historical financial results, historical taxable income, projected future taxable income, the expected timing of the reversals of existing temporary differences, the duration of statutory carryforward periods and tax planning strategies. If, based upon the weight of available evidence, it is more likely than not the deferred tax assets will not be realized, a valuation allowance is recorded.
Concluding that a valuation allowance is not required is difficult when there is significant negative evidence which is objective and verifiable, such as cumulative losses in recent years. We utilize a rolling twelve quarters of pre-tax income or loss adjusted for significant permanent book to tax differences, as well as non-recurring items, as a measure of our cumulative results in recent years. In the United States, our analysis indicates that we have cumulative three year historical losses on this basis. While there are significant impairment, restructuring and refinancing charges driving our cumulative three year loss, this is considered significant negative evidence which is objective and verifiable and therefore, difficult to overcome. However, the three year loss position is not solely determinative and accordingly, we consider all other available positive and negative evidence in our analysis. Based upon our analysis, which incorporated the excess capacity and pricing pressure we have experienced in certain of our product lines, we believe it is more likely than not that the net deferred tax assets in the United States will not be fully realized in the future. Accordingly, we have a valuation allowance related to those net deferred tax assets of $117.8 million as of the year ended 2016. Deferred tax assets related to certain state net operating losses also did not reach the more likely than not realizability criteria and accordingly, were subject to a valuation allowance, the balance of which, as of the year ended 2016, was $11.4 million.
There is no corresponding income tax benefit recognized with respect to losses incurred and no corresponding income tax expense recognized with respect to earnings generated in jurisdictions with a valuation allowance. This causes variability in our effective tax rate. We intend to maintain the valuation allowances until it is more likely than not that the net deferred tax assets will be realized. If operating results improve on a sustained basis, or if certain tax planning strategies are implemented, our conclusions regarding the need for valuation allowances could change, resulting in the reversal of the valuation allowances in the future, which could have a significant impact on income tax expense in the period recognized and subsequent periods.

We recognize a tax position in our consolidated financial statements when it is more likely than not that the position would be sustained upon examination by tax authorities. This recognized tax position is then measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. Although we believe that our estimates are reasonable, the final outcome of uncertain tax positions may be materially different from that which is reflected in our consolidated financial statements. We adjust such reserves upon changes in circumstances that would cause a change to the estimate of the ultimate liability, upon effective settlement or upon the expiration of the statute of limitations, in the period in which such event occurs. For the years ended 2016 and 2015, we did not increase nor reduce our liabilities for uncertain tax positions.
Pension and Other Postretirement Benefit Plans: The valuation of our pension and other postretirement plans requires the use of assumptions and estimates to develop actuarial valuations of expenses, assets and liabilities. Inherent in these valuations are key assumptions, which include discount rate, investment returns and mortality rates. We review our actuarial assumptions on an annual basis and make modifications to the assumptions based on current rates and trends when it is appropriate to do so. The effects of modifications are recognized immediately on our consolidated balance sheet, but are generally amortized into our consolidated statement of operations over future periods, with the deferred amount recorded in accumulated other comprehensive loss. We believe that the assumptions utilized in recording our obligations under our plans are reasonable based on our experience, market conditions and input from our actuaries and investment advisers. We select the discount rate to be used for purposes of

31


computing annual service and interest costs based on the Citigroup Pension Liability Index as of our respective year end dates. The weighted average discount rate used to determine the benefit obligation as of the years ended 2016 and 2015 was 3.75% and 4.00%, respectively. A one percentage point decrease in the discount rate at year end 2016 would increase the pension and other postretirement plans’ projected benefit obligation by approximately $45.6 million. A one percentage point increase in the discount rate at the year ended 2016 would decrease the pension and other postretirement plans’ projected benefit obligation by approximately $37.6 million.
    
Beginning in 2014, we began to allow certain participants in the pension plans the option of settling their vested benefits through the receipt of a lump-sum payment. Lump-sum payments made in 2015 and 2016 did not meet the criteria to apply settlement accounting. Since settlement via lump-sum payment is dependent on an employee's decision and election, the extent of future settlements and the associated losses may fluctuate significantly.
Our investment objective is to maximize the long-term return on the pension plan assets within prudent levels of risk. Investments are primarily diversified with a blend of equity securities, fixed income securities and alternative investments. Equity investments are diversified by including United States and non-United States stocks, growth stocks, value stocks and stocks of large and small companies. Fixed income securities are primarily United States governmental and corporate bonds, including mutual funds. Alternative investments are primarily private equity hedge funds and hedge fund-of-funds. We consult with our financial advisers on a regular basis regarding our investment objectives and asset performance.
New Accounting Pronouncements: We are required to adopt certain new accounting pronouncements. See Note 1 to our consolidated financial statements.
Commitments and Contingencies: Our business and operations are subject to a number of significant risks, most of which are summarized in our "Risk Factors" in Item 1A, and in Note 14 to our consolidated financial statements.

32



Item 7A. Quantitative and Qualitative Disclosures About Market Risk
 
We are exposed to market risks such as changes in interest and foreign currency exchange rates, which may adversely affect our results of operations and financial position.

As of the year ended 2016, we had variable rate debt outstanding of $81.7 million. A change of 1% to the current London Interbank Offered Rate, which we refer to as LIBOR, would have a minimal impact to our interest expense.

Our changes in foreign currency exchange rates are managed through normal operating and financing activities. Subsequent to the sale of the Packaging Business on January 19, 2016, we have minimal exposure to market risk for changes in foreign currency exchange rates. For the year ended 2016, a uniform 10% strengthening of the United States dollar relative to the local currency of our foreign operations would have had a minimal impact to our sales and operating income.


33


Item 8.   Financial Statements

Report of Independent Registered Public Accounting Firm

Board of Directors and Shareholders
Cenveo, Inc.
Stamford, Connecticut

We have audited the accompanying consolidated balance sheets of Cenveo, Inc. and subsidiaries (the "Company") as of December 31, 2016 and January 2, 2016 and the related consolidated statements of comprehensive income (loss), changes in shareholders’ (deficit) equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Cenveo, Inc. and subsidiaries as of December 31, 2016 and January 2, 2016, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Cenveo, Inc. and subsidiaries’ internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control -Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated February 23, 2017 expressed an unqualified opinion thereon.


/s/ BDO USA, LLP
New York, New York
February 23, 2017


34


CENVEO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except par values)
 
 
 
2016
 
2015
 
 
 
 
Assets
 
 
 
Current assets:
 

 
 

Cash and cash equivalents
$
5,532

 
$
7,785

Accounts receivable, net
234,187

 
254,042

Inventories, net
101,950

 
121,615

Prepaid and other current assets
41,576

 
46,731

Assets of discontinued operations - current

 
48,566

Total current assets
383,245

 
478,739

 
 
 
 
Property, plant and equipment, net
207,679

 
210,578

Goodwill
175,209

 
175,338

Other intangible assets, net
124,831

 
130,450

Other assets, net
21,995

 
24,070

Assets of discontinued operations - long-term

 
62,851

Total assets
$
912,959

 
$
1,082,026

Liabilities and Shareholders’ Deficit
 

 
 

Current liabilities:
 

 
 

Current maturities of long-term debt
$
31,727

 
$
5,373

Accounts payable
175,896

 
200,120

Accrued compensation and related liabilities
24,684

 
31,961

Other current liabilities
82,899

 
88,814

Liabilities of discontinued operations - current

 
22,268

Total current liabilities
315,206

 
348,536

 
 
 
 
Long-term debt
986,939

 
1,203,250

Other liabilities
199,971

 
198,926

Liabilities of discontinued operations - long-term

 
1,153

Commitments and contingencies


 


Shareholders’ deficit:
 

 
 

Preferred stock, $0.01 par value; 25 shares authorized, no shares issued

 

Common stock, $0.01 par value; 15,000 and 12,500 shares authorized, 8,553 and 8,484 shares issued and outstanding as of the years ended 2016 and 2015, respectively
86

 
85

Paid-in capital
382,271

 
372,240

Retained deficit
(868,285
)
 
(936,234
)
Accumulated other comprehensive loss
(103,229
)
 
(105,930
)
Total shareholders’ deficit
(589,157
)
 
(669,839
)
Total liabilities and shareholders’ deficit
$
912,959

 
$
1,082,026

 
See notes to consolidated financial statements.

35


CENVEO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands, except per share data)

 
 
For The Years Ended
 
 
2016
 
2015
Net sales
 
$
1,660,001

 
$
1,741,779

Cost of sales
 
1,386,746

 
1,450,876

Selling, general and administrative expenses
 
179,525

 
186,749

Amortization of intangible assets
 
5,744

 
7,785

Restructuring and other charges
 
11,954

 
12,576

Operating income
 
76,032

 
83,793

Interest expense, net
 
85,753

 
100,805

(Gain) loss on early extinguishment of debt, net
 
(82,481
)
 
1,252

Other income, net
 
(2,344
)
 
(3,196
)
Income (loss) from continuing operations before income taxes
 
75,104

 
(15,068
)
Income tax expense
 
4,258

 
4,393

Income (loss) from continuing operations
 
70,846

 
(19,461
)
Loss from discontinued operations, net of taxes
 
(2,897
)
 
(11,390
)
Net income (loss)
 
67,949

 
(30,851
)
Other comprehensive income (loss):
 
 
 
 
Changes in pension and other employee benefit accounts, net of taxes
 
756

 
(3,438
)
Currency translation adjustment, net
 
1,945

 
(4,295
)
Total other comprehensive income (loss)
 
2,701

 
(7,733
)
Comprehensive income (loss)
 
$
70,650

 
$
(38,584
)
 
 
 
 
 
Income (loss) per share – basic:
 
 
 
 
Continuing operations
 
$
8.31

 
$
(2.30
)
Discontinued operations
 
(0.34
)
 
(1.34
)
Net income (loss)
 
$
7.97

 
$
(3.64
)
 
 
 
 
 
Income (loss) per share – diluted:
 
 
 
 
Continuing operations
 
$
7.63

 
$
(2.30
)
Discontinued operations
 
(0.31
)
 
(1.34
)
Net income (loss)
 
$
7.32

 
$
(3.64
)
 
 
 
 
 
Weighted average shares outstanding:
 
 

 
 

Basic
 
8,527

 
8,479

Diluted
 
9,492

 
8,479

 
 
See notes to consolidated financial statements.

36


CENVEO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 
For The Years Ended
 
2016
 
2015
Cash flows from operating activities:
 
 
 
Net income (loss)
$
67,949

 
$
(30,851
)
  Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 

 
 

(Gain) loss on sale of discontinued operations, net of taxes
(69
)
 
4,987

Loss from discontinued operations, net of taxes
2,966

 
6,403

Depreciation
41,456

 
41,904

Amortization of intangible assets
5,744

 
7,785

Non-cash interest expense, net
9,003

 
10,057

Deferred income taxes
1,280

 
2,743

Gain on sale of assets
(4,330
)
 
(5,356
)
Non-cash restructuring and other charges, net
3,638

 
5,936

(Gain) loss on early extinguishment of debt, net
(82,481
)
 
1,252

Provisions for bad debts
1,415

 
2,567

Provisions for inventory obsolescence
2,826

 
2,359

Stock-based compensation provision
1,468

 
1,636

Changes in operating assets and liabilities, excluding the effects of acquired businesses:
 

 
 

Accounts receivable
18,397

 
(3,953
)
Inventories
16,820

 
(5,130
)
Accounts payable and accrued compensation and related liabilities
(33,781
)
 
(16,363
)
Other working capital changes
(2,534
)
 
3,103

Other, net
(384
)
 
(12,853
)
Net cash provided by operating activities of continuing operations
49,383

 
16,226

Net cash (used in) provided by operating activities of discontinued operations
(10,512
)
 
15,968

Net cash provided by operating activities
38,871

 
32,194

Cash flows from investing activities:
 

 
 

Cost of business acquisitions, net of cash acquired

 
(1,996
)
Capital expenditures
(41,137
)
 
(25,928
)
Proceeds from sale of property, plant and equipment
8,330

 
8,558

Proceeds from sale of assets
2,000

 
2,180

Net cash used in investing activities of continuing operations
(30,807
)
 
(17,186
)
Net cash provided by (used in) investing activities of discontinued operations
95,866

 
(2,282
)
Net cash provided by (used in) investing activities
65,059

 
(19,468
)
Cash flows from financing activities:
 

 
 

Proceeds from issuance of 4% senior secured notes due 2021
50,000

 

Payment of financing related costs and expenses and debt issuance discounts
(11,576
)
 
(1,596
)
Proceeds from issuance of other long-term debt

 
12,500

Repayments of other long-term debt
(5,578
)
 
(16,545
)
Repayment of 11.5% senior notes due 2017
(24,725
)
 
(22,720
)
Repayment of 7% senior exchangeable notes due 2017
(45,903
)
 

Repayment of 8.500% junior secured priority notes due 2022
(4,550
)
 

Purchase and retirement of common stock upon vesting of restricted stock units
(346
)
 
(216
)
Borrowings under asset-based revolving credit facility due 2021
474,300

 
468,300

Repayments under asset-based revolving credit facility due 2021
(540,800
)
 
(454,800
)
Net cash used in financing activities of continuing operations
(109,178
)
 
(15,077
)
Net cash used in financing activities of discontinued operations
(8
)
 
(473
)
Net cash used in financing activities
(109,186
)
 
(15,550
)
Effect of exchange rate changes on cash and cash equivalents
232

 
(1,213
)
Net decrease in cash and cash equivalents
(5,024
)
 
(4,037
)
Cash and cash equivalents at beginning of period
10,556

 
14,593

Cash and cash equivalents at end of period
5,532

 
10,556

Less cash and cash equivalents of discontinued operations

 
(2,771
)
Cash and cash equivalents of continuing operations at end of period
$
5,532

 
$
7,785

 
 
 
 
Supplemental cash flow disclosures: (1)
 
 
 
Cash paid for interest
$
79,267

 
$
91,455

Cash paid for taxes, net
4,698

 
739

Non-cash origination of capital leases
1,280

 
2,518

 __________________________

(1) During the year ended 2016, the Company issued warrants in association with various debt transactions. See Note 8 for the description of these transactions.
See notes to consolidated financial statements.

37



CENVEO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ (DEFICIT)
EQUITY
(in thousands)
 
Common
Stock
 
Paid-In
Capital
 
Retained
Deficit
 
Accumulated
Other
Comprehensive
(Loss) Income
 
Total
Shareholders’
(Deficit)
Equity
 
Shares
 
Amount
 
 
 
 
 
 
 
 
Balance as of the year ended 2014
8,460

 
$
85

 
$
370,820

 
$
(905,383
)
 
$
(98,197
)
 
$
(632,675
)
Comprehensive loss:
 

 
 

 
 

 
 

 
 

 
 

Net loss                                                                     
 

 
 

 
 

 
(30,851
)
 
 

 
(30,851
)
Other comprehensive loss:
 

 
 

 
 

 
 

 
 

 
 

Changes in pension and other employee benefit accounts, net of tax benefit of zero
 

 
 

 
 

 
 

 
(3,438
)
 
(3,438
)
Currency translation adjustment, net
 

 
 

 
 

 
 

 
(4,295
)
 
(4,295
)
Other comprehensive loss
 

 
 

 
 

 
 

 
 

 
(7,733
)
Total comprehensive loss
 

 
 

 
 

 
 

 
 

 
(38,584
)
Purchase and retirement of common stock upon vesting of restricted stock units
24

 

 
(216
)
 
 

 
 

 
(216
)
Amortization of stock based compensation
 

 
 
 
1,636

 
 

 
 

 
1,636

Balance as of the year ended 2015
8,484

 
85

 
372,240

 
(936,234
)
 
(105,930
)
 
(669,839
)
Comprehensive income (loss):
 

 
 

 
 

 
 

 
 

 
 

Net income                                                          
 

 
 

 
 

 
67,949

 
 

 
67,949

Other comprehensive income:
 

 
 

 
 

 
 

 
 

 
 

Changes in pension and other employee benefit accounts, net of tax benefit of zero
 

 
 

 
 

 
 

 
756

 
756

Currency translation adjustment, net
 

 
 

 
 

 
 

 
1,945

 
1,945

Other comprehensive income
 

 
 

 
 

 
 

 
 

 
2,701

Total comprehensive income
 

 
 

 
 

 
 

 
 

 
70,650

Issuance of Warrants in connection with the Exchange Offer (1)
 
 
 
 
6,264

 
 

 
 

 
6,264

Impact of Exchange Offer with affiliated noteholders (1)
 
 
 
 
1,375

 
 

 
 

 
1,375

Issuance of Warrants in connection with the repurchase of the 7% senior exchangeable notes due 2017 (1)
 
 
 
 
1,270

 
 

 
 

 
1,270

Purchase and retirement of common stock upon vesting of restricted stock units
69

 
1

 
(346
)
 
 

 
 

 
(345
)
Amortization of stock based compensation
 

 
 
 
1,468

 
 

 
 

 
1,468

Balance as of the year ended 2016
8,553

 
$
86

 
$
382,271

 
$
(868,285
)
 
$
(103,229
)
 
$
(589,157
)
 __________________________

(1) See Note 8 for description of the Warrants and Exchange Offer.

See notes to consolidated financial statements.



38

CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Summary of Significant Accounting Policies
Basis of Presentation: The consolidated financial statements include the results of Cenveo, Inc. and its subsidiaries and have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). All intercompany transactions have been eliminated. Certain amounts in the 2015 consolidated balance sheet have been reclassified to conform to current year presentation.
Cenveo, Inc. and its wholly-owned subsidiaries (collectively, the "Company" or "Cenveo") are engaged in envelope converting, commercial printing, and the manufacturing of label products. The Company is headquartered in Stamford, Connecticut, is organized under Colorado law, and its common stock is traded on the New York Stock Exchange under the symbol "CVO." The Company operates a network of strategically located manufacturing facilities, serving a diverse base of customers. The Company’s operations are based in North America and India.
The Company’s reporting periods for 2016 and 2015 in this report consisted of 52 and 53 week periods, respectively, and ended on December 31, 2016 and January 2, 2016, respectively. Such periods are referred to herein as: (i) "as of the year ended 2016," "the year ended 2016" or "2016;" and (ii) "as of the year ended 2015," "the year ended 2015" or "2015." All references to years and year-ends herein relate to fiscal years rather than calendar years.

As a result of exploring opportunities to divest certain non-strategic or underperforming businesses within its manufacturing platform, during the first quarter of 2016 the Company completed the sale of its folded carton and shrink sleeve packaging businesses, along with its one top-sheet lithographic print operation (collectively, the "Packaging Business"). See Note 3 for information regarding the completion of sale of the Packaging Business. In accordance with the guidance in Accounting Standards Codification ("ASC") 205-20 Presentation of Financial Statements - Discontinued Operations and ASC 360 Property, Plant & Equipment, the financial results of the Packaging Business have been accounted for as discontinued operations for all periods presented.

On July 8, 2016, the Company announced a reverse split of its common stock, par value $0.01 per share (the "Common Stock"), at a ratio of 1-for-8, effective July 13, 2016 (the "Reverse Stock Split"). The Common Stock began trading on a split-adjusted basis on July 14, 2016. The Reverse Stock Split was approved by the Company’s stockholders at the annual meeting of the stockholders held on May 26, 2016. As a result of the Reverse Stock Split, each eight pre-split shares of Common Stock outstanding were automatically combined into one new share of Common Stock without any action on the part of the respective holders, and the number of outstanding common shares on the date of the split was reduced from approximately 68.5 million shares to approximately 8.5 million shares. The Reverse Stock Split also applied to Common Stock issuable upon the exchange of the Company’s outstanding 7% senior exchangeable notes due 2017 (the "7% Notes") and upon the exercise of the Company's outstanding warrants. Additionally, the Reverse Stock Split applied to the Company's outstanding stock options, restricted share units ("RSUs"), and performance share units ("PSUs"), (collectively, the "Equity Awards"). In addition, the authorized Common Stock was initially increased from 100 million to 120 million shares and then adjusted in the Reverse Stock Split from 120 million to 15 million shares. The Company's historical consolidated financial statements have been retroactively adjusted to give recognition to the Reverse Stock Split for all periods presented.

Use of Estimates: The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Estimates and assumptions are used for, but not limited to, establishing the allowance for doubtful accounts, valuation of inventory, purchase price allocation, depreciation and amortization lives, asset impairment evaluations, deferred tax assets and liabilities, self-insurance accruals, stock-based compensation and other contingencies. Actual results could differ from estimates.
Fair Value Measurements: Certain assets and liabilities of the Company are required to be recorded at fair value. Fair value is determined based on the exchange price that would be received for an asset or paid to transfer a liability in an orderly transaction between market participants. The fair value of cash and cash equivalents, accounts receivable and accounts payable approximate their carrying values due to their short-term nature. The Company also has other assets or liabilities that it records at fair value, such as its pension plan assets. The three-tier value hierarchy, which prioritizes the inputs used in the valuation methodologies, is as follows:
 Level 1
Valuations based on quoted prices for identical assets and liabilities in active markets.
 Level 2
Valuations based on observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.

39

CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 Level 3
Valuations based on unobservable inputs reflecting the Company’s own assumptions, consistent with reasonably available assumptions made by other market participants.
Cash and Cash Equivalents: Cash and cash equivalents include cash on deposit and highly liquid investments with original maturities of three months or less. The Company places its cash and cash equivalents with institutions with high credit quality. However, at certain times, such cash and cash equivalents may be in excess of Federal Deposit Insurance Corporation insurance limits. Cash and cash equivalents are stated at cost, which approximates fair value.
Accounts Receivable: Trade accounts receivable are stated net of allowances for doubtful accounts. Specific customer provisions are made when a review of significant outstanding amounts, customer creditworthiness and current economic trends indicate that collection is doubtful. In addition, provisions are made at differing amounts, based upon the balance and age of the receivable and the Company’s historical collection experience. Trade accounts are charged off against the allowance for doubtful accounts or expensed when it is probable the accounts will not be recovered. As of the years ended 2016 and 2015, accounts receivable were reduced by an allowance for doubtful accounts of $2.1 million and $5.9 million, respectively. Transactions affecting the allowance for doubtful accounts are as follows (in thousands):

 
 
For The Years Ended
 
 
2016
 
2015
Balance at beginning of year
 
$
5,872

 
$
4,632

Charged to expense
 
1,415

 
2,567

Write-offs, recoveries and other, net
 
(5,152
)
 
(1,327
)
Balance at end of year
 
$
2,135

 
$
5,872


Inventories: Inventories are stated at the lower of cost or market, with cost primarily determined on a first-in, first-out or average cost basis and stated net of reserves for obsolescence. Cost includes materials, labor and overhead related to the purchase and production of inventories.

Property, Plant and Equipment: Property, plant and equipment are recorded at cost and depreciated over their estimated useful lives. Depreciation is provided using the straight-line method generally based on the estimated useful lives of 15 to 45 years for buildings and building improvements, 10 to 15 years for machinery and equipment and 3 to 10 years for furniture and fixtures. Leasehold improvements are amortized over the shorter of the lease term or the estimated useful life of the improvements. When an asset is retired or otherwise disposed of, the related gross cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in the statement of operations. Expenditures for repairs and maintenance are charged to expense as incurred, and expenditures that increase the capacity, efficiency or useful lives of existing assets are capitalized.

Computer Software: The Company develops and purchases software for internal use. Software development costs incurred during the application development stage are capitalized. Once the software has been installed, tested and is ready for use, additional costs in connection with the software are expensed as incurred. Capitalized computer software costs are amortized over the estimated useful life of the software, generally between three and seven years. Net computer software costs included in property, plant and equipment were $20.7 million and $16.6 million as of the years ended 2016 and 2015, respectively.

Debt Issuance Costs: Direct expenses such as legal, accounting and underwriting fees incurred to issue, extend or amend debt are included as a reduction in the carrying amount of the related debt, with the exception of costs incurred in connection with the Company's asset-based revolving credit facility (the "ABL Facility") which are recorded in other assets, net. Debt issuance costs are recorded net of accumulated amortization, and are amortized to interest expense over the term of the related debt. Debt issuance costs of $18.1 million and $16.5 million were recorded as a reduction to long-term debt as of the years ended 2016 and 2015, respectively, and $3.6 million and $2.4 million were recorded in other assets, net, as of the years ended 2016 and 2015, respectively. Interest expense includes the amortization of debt issuance costs of $9.0 million and $10.1 million in 2016 and 2015, respectively.

Goodwill and Other Intangible Assets: Goodwill represents the excess of purchase price over the fair value of net assets of businesses acquired. Goodwill is not amortized. Goodwill is subject to an annual impairment test and is reviewed annually as of the end of November to determine if there is an impairment, or more frequently if an indication of possible impairment exists. Impairment testing for goodwill is performed at a reporting unit level, with all goodwill assigned to a reporting unit. The Company's reporting units are the same as its three operating segments. An impairment loss generally would be recognized when the carrying amount of the reporting unit's net assets exceeds the estimated fair value of the reporting unit. No impairment charges for goodwill were recorded for years ended 2016 and 2015, except as disclosed in Note 3, which relates to discontinued operations.

40

CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


Other intangible assets consist primarily of customer relationships and trademarks. Other intangible assets primarily arise from the purchase price allocations of businesses acquired. Intangible assets with determinable lives are amortized on a straight-line basis over the estimated useful life assigned to these assets. Intangible assets that are expected to generate cash flows indefinitely are not amortized, but are evaluated for impairment using the relief-from-royalty method. There were no intangible asset impairments for the years ended 2016 or 2015.

Long-Lived Assets: Long-lived assets, including property, plant and equipment, and intangible assets with definite lives, are evaluated for impairment whenever events or changes in circumstances indicate that the carrying value of the assets may not be fully recoverable. An impairment is assessed if the undiscounted expected future cash flows generated from an asset are less than its carrying value. Impairment losses are recognized for the amount by which the carrying value of an asset exceeds its fair value (Level 2 and 3). Additionally, the estimated useful lives of all long-lived assets are periodically reviewed and revised, if necessary.
Self-Insurance: The Company is self-insured for the majority of its workers’ compensation costs and health insurance costs, subject to specific retention levels. The Company records its liability for workers’ compensation claims on a fully-developed basis. The Company’s liability for health insurance claims includes an estimate for claims incurred, but not reported. As of the years ended 2016 and 2015, the (i) undiscounted workers' compensation liability was $12.1 million and $12.3 million, respectively, and the discounted liability was $11.2 million and $11.4 million, respectively, using discount rates of 2% for each of the years ended 2016 and 2015; and the (ii) healthcare liability was $3.2 million for each of the years ended 2016 and 2015, respectively.
Pension and Other Postretirement Plans: The Company records expense relating to its pension and other postretirement plans based on actuarial calculations. The inputs for these estimates mainly include discount rates, anticipated mortality rates and assumed rates of return. The Company reviews its actuarial assumptions on an annual basis and modifies the assumptions based on current anticipated rates. The effect of modifications on the value of plan obligations and assets is recognized in accumulated other comprehensive income (loss) ("AOCI") and is recognized in the statement of operations over future periods.
Revenue Recognition: The Company recognizes revenue when persuasive evidence of an arrangement exists, product delivery has occurred, pricing is fixed or determinable, and collection is reasonably assured, net of rebates earned by customers. Since a significant portion of the Company’s products are customer specific, it is common for customers to inspect the quality of the product at the Company’s facility prior to its shipment. Products shipped are not subject to contractual right of return provisions.
Sales Tax: The Company records sales net of applicable sales tax.
Freight Costs: The costs of delivering finished goods to customers are recorded as freight costs and included in cost of sales. Freight costs that are either billed separately to the customer or included in the price of the product are included in net sales.
Advertising Costs: All advertising costs are expensed as incurred. Advertising costs were $3.7 million and $3.2 million for 2016 and 2015, respectively.
Stock-Based Compensation: The Company uses the fair value method of accounting for stock-based compensation. The Company uses the Black-Scholes-Merton option-pricing model ("Black-Scholes") to measure fair value of stock option awards. The Black-Scholes model requires the Company to make significant judgments regarding the assumptions used within the model, the most significant of which are the stock price volatility assumption, the expected life of the option award, the risk-free rate of return and dividends during the expected term. The Company recognizes stock-based compensation expense for share-based awards expected to vest on a straight-line basis over the requisite service period of the award based on their grant date fair value.
Foreign Currency Translation: Assets and liabilities of subsidiaries operating outside the United States with a functional currency other than the United States dollar are translated at year-end exchange rates. The effects of translation are included in shareholders’ deficit. Income and expense items and gains and losses are translated at the average monthly rate. Foreign currency transaction gains and losses are recorded in other income, net when the underlying transaction takes place.
Income Taxes: Deferred income taxes reflect the future tax effect of temporary differences between the carrying amount of assets and liabilities for financial and income tax reporting and are measured by applying statutory tax rates in effect for the year during which the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance to the extent it is more likely than not that the net deferred tax assets will not be realized. The Company has a full valuation allowance related to its net U.S. deferred tax assets as of the year ended 2016.

The Company recognizes a tax position in its consolidated financial statements when it is more likely than not that the position would be sustained upon examination by tax authorities. This recognized tax position is then measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. Although the Company believes

41

CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

that its estimates are reasonable, the final outcome of uncertain tax positions may be materially different from that which is recognized in its consolidated financial statements. The Company adjusts such reserves upon changes in circumstances that would cause a change to the estimate of the ultimate liability, upon effective settlement or upon the expiration of the statute of limitations, in the period in which such event occurs.
New Accounting Pronouncements: In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, "Revenue from Contracts with Customers (Topic 606)." The new revenue recognition standard provides a five-step analysis to determine when and how revenue is recognized. The standard requires that a company recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which a company expects to be entitled in exchange for those goods or services. This ASU is effective for annual periods beginning after December 15, 2017 and will be applied retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. The Company is currently evaluating the impact of the pending adoption of ASU 2014-09; however, we do not expect that the future adoption of ASU 2014-09 will have a material impact on its consolidated financial statements.

In May 2015, the FASB issued ASU 2015-07, "Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)". This ASU removes the requirement to categorize all investments for which fair value is measured at the net asset value per share practical expedient within the fair value hierarchy. The Company adopted ASU 2015-07 during 2016 and applied the provisions retrospectively to all periods presented. Adoption of ASU 2015-07 did not have a material impact on the Company's consolidated financial statements, other than enhancing the disclosures in Note 13.
In July 2015, the FASB issued ASU 2015-11, "Inventory (Topic 340): Simplifying the Measurement of Inventory." Under ASU 2015-11, companies utilizing the first-in, first-out or average cost method should measure inventory at the lower of cost or net realizable value, whereas net realizable value is defined as the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. This ASU is effective for interim and annual reporting periods beginning after December 15, 2016. The Company expects that the future adoption of ASU 2015-11 will not have a material impact on its consolidated financial statements.

In November 2015, the FASB issued ASU 2015-17 "Balance Sheet Classification of Deferred Taxes." ASU 2015-17 simplifies the presentation of deferred income taxes to require that deferred tax assets and liabilities be classified as non-current in a classified balance sheet. This ASU is effective for annual periods beginning after December 15, 2016. As of year ended 2016, the Company had $3.4 million of current deferred tax assets that would be reclassified from prepaid and other current assets to other liabilities.

In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)." The new standard establishes a right-of-use ("ROU") model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the statement of operations. This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years and early adoption is permitted. A modified retrospective transition approach is required for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. At a minimum, adoption of ASU 2016-02 will require recording a ROU asset and a lease liability on the Company's consolidated balance sheet; however, the Company is still currently evaluating the impact on its consolidated financial statements. See Note 14 for the current anticipated future operating lease payments.

In March 2016, the FASB issued ASU 2016-09, "Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting." The new standard simplifies various aspects related to how share-based payments are accounted for and presented in the consolidated financial statements. The amendments include income tax consequences, the accounting for forfeitures, classification of awards as either equity or liabilities and classification on the statement of cash flows. The guidance is effective in the first quarter of fiscal 2017 and early adoption is permitted if all amendments are adopted in the same period. The Company expects that the future adoption of ASU 2016-09 will not have a material impact on its consolidated financial statements.

In August 2016, the FASB issued ASU No. 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments." ASU 2016-15 reduces the diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. This ASU is effective for interim and annual reporting periods beginning after December 15, 2017. The Company expects that the future adoption of ASU 2016-15 will not have a material impact on its consolidated financial statements.


42

CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

In January 2017, the FASB issued ASU 2017-04 "Intangibles - Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment" which removes the second step from the goodwill impairment test. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. ASU 2017-04 is effective for annual and interim periods beginning January 1, 2020, with early adoption permitted, and applied prospectively. The Company expects that the future adoption of ASU 2017-04 will not have a material impact on its consolidated financial statements.

2. Acquisitions

The Company accounts for business combinations under the provisions of ASC 805 "Business Combinations." Acquisitions are accounted for by the acquisition method, and accordingly, the assets and liabilities of the acquired businesses have been recorded at their estimated fair values on the acquisition date with the excess of the purchase price over their estimated fair values recorded as goodwill. In the event the estimated fair values of the assets and liabilities acquired exceed the purchase price paid, a bargain purchase gain is recorded in the statements of operations.

Acquisition-related costs are expensed as incurred. Acquisition-related costs, including integration costs, are included in selling, general and administrative expenses and were zero and $1.1 million for the years ended 2016 and 2015, respectively.

Asendia

On August 7, 2015, the Company acquired certain assets of Asendia USA, Inc. ("Asendia"). The acquired assets provide letter shop, data processing, bindery and digital printing offerings. The Company also added approximately 40 employees. The total purchase price of approximately $2.0 million was allocated to the tangible and identifiable intangible assets acquired based on their estimated fair values at the acquisition date, and was assigned to the Company's print segment. The acquired identifiable intangible assets relate to customer relationships of $0.1 million.

Purchase Price Allocation

The following table summarizes the allocation of the purchase price to the assets acquired and liabilities assumed in the Asendia acquisition (in thousands):

Accounts receivable, net
 
$
145

Inventories
 
46

Prepaid and other current assets
 
10

Property, plant and equipment
 
1,662

Other intangible assets
 
133

   Total assets acquired
 
$
1,996


The results of operations and cash flows are included in the Company’s statements of operations and cash flows from August 7, 2015. Pro forma results for the year ended 2015 are not presented as the effect would not be material.

3. Discontinued Operations

On January 19, 2016, the Company completed the sale of the Packaging Business. The Company received total cash proceeds of approximately $89.6 million, net of transaction costs of approximately $6.3 million. This resulted in the recognition of a total loss of $3.6 million, of which a gain of $1.4 million was recorded for the year ended 2016. For the year ended 2015, the Company recorded a non-cash loss on sale of $5.0 million and a non-cash goodwill impairment charge of $9.9 million related to this transaction. This loss was based on the executed purchase agreement and the net assets of the Packaging Business. In accordance with the guidance in ASC 205-20 Presentation of Financial Statements - Discontinued Operations and ASC 360 Property, Plant & Equipment, the financial results of the Packaging Business were accounted for as discontinued operations.

The following table shows the components of assets and liabilities that are classified as discontinued operations in the Company's consolidated balance sheets as of December 31, 2016, and January 2, 2016 (in thousands):


43

CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 
 
2016
 
2015
Accounts receivable, net
 
$

 
$
23,244

Inventories
 

 
18,603

Other current assets
 

 
6,719

Assets of discontinued operations - current
 

 
48,566

Property, plant and equipment, net
 

 
48,244

Goodwill and other long-term assets
 

 
14,607

Assets of discontinued operations - long-term
 

 
62,851

Accounts payable
 

 
17,917

Other current liabilities
 

 
4,351

Liabilities of discontinued operations - current
 

 
22,268

Long-term debt and other liabilities
 

 
1,153

Liabilities of discontinued operations - long-term
 

 
1,153

Net assets of discontinued operations
 
$

 
$
87,996


The following table summarizes certain statement of operations information for discontinued operations (in thousands, except per share data):

 
 
For The Years Ended
 
 
2016
 
2015
Net sales
 
$
6,637

 
$
178,850

Cost of sales
 
6,625

 
154,570

Selling, general and administrative expenses
 
2,242

 
20,630

Amortization of intangible assets
 

 
2,062

Restructuring and other charges
 

 
390

Impairment of goodwill
 

 
9,857

Interest expense, net
 
7

 
117

Other expense (income), net
 
729

 
(954
)
Loss from discontinued operations
 
(2,966
)
 
(7,822
)
Gain (loss) on sale of discontinued operations
 
1,405

 
(4,987
)
Loss from discontinued operations before income taxes
 
(1,561
)
 
(12,809
)
Income tax expense (benefit) on discontinued operations
 
1,336

 
(1,419
)
Loss from discontinued operations, net of taxes
 
$
(2,897
)
 
$
(11,390
)
Loss per share - basic
 
$
(0.34
)
 
$
(1.34
)
Loss per share - diluted
 
$
(0.31
)
 
$
(1.34
)

4. Inventories
 
Inventories by major category are as follows (in thousands):
 
 
 
2016
 
2015
Raw materials
 
$
32,696

 
$
40,938

Work in process
 
12,186

 
14,696

Finished goods
 
57,068

 
65,981

 
 
$
101,950

 
$
121,615



44

CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

5. Property, Plant and Equipment
 
Property, plant and equipment are as follows (in thousands):
 
 
 
2016
 
2015
Land and land improvements
 
$
8,537

 
$
9,194

Buildings and building improvements
 
82,440

 
82,206

Machinery and equipment
 
546,425

 
525,914

Furniture and fixtures
 
9,553

 
8,696

Construction in progress
 
10,885

 
10,181

 
 
657,840

 
636,191

Accumulated depreciation
 
(450,161
)
 
(425,613
)
 
 
$
207,679

 
$
210,578


Sale-Leaseback Transactions

During the second quarter of 2016, the Company sold